Bond Liquidity Indicators: Can New Thomson Reuters Indices Explain Difference in Bond Returns?
The rapidly growing Russian national currency bond market is demonstrating attractive yield levels after global crisis 2008-2009. A significant share of ruble bond issues has relatively low trading volume, so liquidity risk is of particular importance for potential investors. This article provides an analysis of theoretical approaches to the construction of bond liquidity integral indices andreviews existing practice in the Russian market. First, it compares methodologies of Russian investment banks (Trust, Gazprombank, Zenith and others) and a new cyclic algorithm introduced by Thomson Reuters Agency (TRLI 2015). In empirical part of our research Thomson Reuters’ integral indices of bond liquidity (weighted and non-weighted) are tested in the context of explaining the difference in yields of 1118 Russian national currency bonds outstanding (including government,municipal and corporate bonds). The multi-factor cross-sectional regression analysis results show that the influence of both Thomson Reuters liquidity indices on Russian bond yields is fairly stable. Duration and S&P rating also exert stable influence on bond yields. The non-weighted liquidity index has better explanatory power than the weighted one.