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Spanish Treasury Bond Market Liquidity Pre- and Post-European Monetary Union

35 Pages Posted: 18 May 2004 Last revised: 15 Jul 2011

Antonio Diaz

University of Castilla-La Mancha

Eliseo Navarro

University of Castilla-La Mancha

John J. Merrick Jr.

College of William and Mary - Mason School of Business

Date Written: January 9, 2004

Abstract

This paper examines liquidity in the Spanish Treasury bond market in the context of debt policy shifts engineered by the Spanish government in preparation for entrance into European Monetary Union. Empirically detectable impacts of Spain's mid-1997 debt management initiatives exist for both trading activity and debt market valuation. We interpret these impacts through shifts in the coefficients of a liquidity life cycle model relating individual Treasury bond market share to a bond's age (the time since its initial auction). Tests for shifts in this market share function as a result of the Treasury's debt policy innovations clearly reject the hypothesis of no structural change in the post-initiatives sample period. We also estimate the structure of liquidity premiums in the different maturity sectors within the Spanish bond market. We investigate liquidity effects within a framework that values the flow of liquidity services generated over a bond's entire life. Lifetime liquidity involves not only a security's current of liquidity, but also the expected future amount of liquidity. Our empirical results for 10-year Spanish treasury bonds reveal statistically significant valuation impacts of expected future liquidity on current market value. The measures developed here add significant explanatory power to the traditional auction status dummy variable approaches to assessing bond liquidity value.

Keywords: Bonds, Liquidity, Spanish Public Debt, European Monetary Union

JEL Classification: G12, G15

Suggested Citation

Diaz, Antonio and Navarro, Eliseo and Merrick, John J., Spanish Treasury Bond Market Liquidity Pre- and Post-European Monetary Union (January 9, 2004). EFMA 2004 Basel Meetings Paper; Journal of Banking and Finance, Vol. 30, No. 4, 2006. Available at SSRN: https://ssrn.com/abstract=498922

Antonio Diaz Perez

University of Castilla-La Mancha ( email )

Plaza Universidad, 1
Albacete, Albacete 02071
Spain

Eliseo Navarro (Contact Author)

University of Castilla-La Mancha ( email )

Plaza Universidad, 1
02071 Albacete, Ciudad Real 13071
Spain

John Merrick

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757-221-2721 (Phone)
757-221-2937 (Fax)

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