Analysis of the Liquidity Patterns on the Russian Bond Market
Recent research on the international Monetary Fund [Global Financial Stability Report, 2015] outlines that participants of fixed income assets market in advanced and emerging market economies have become worried that both the level of market liquidity and its resilience may be declining.
The market liquidity is a many-dimensional concept and cannot be captured by any single measure. Nonetheless, depending on what dimension of market liquidity one is trying to estimate (for instance, time, cost, or quantity) some measures are more informative than others.
Based on the data provided by the National Settlement Depository and the National Fund Association and covered the period from the 6 January 2014 to 15 June 2015 the liquidity of 1497 different bond emissions was analyzed. We calculate a daily liquidity index for each bond using Pareto regularization approach [Gambarov, 2010]. This index is constructed from three bond emission characteristics: trading volume, number of trading days, and number of transactions. We found that the most important factor from these three for Russian bonds is the number of trading days due to the very low trade intensity of Russian fixed income market (the largest part of the Russian corporate bonds even has no active market).
Considering the average liquidity on the Russian bond market we conclude that during last year the deterioration tendency has been dominating on the market. Thus, the main purpose of current research is to analyze which factors bring the major impact on the market liquidity (in particular, weaken) in Russia and in other advanced and emerging market countries.
A lot of factors affect the liquidity of the markets, which can be broadly divided into three groups: risk-driven factors, cost-driven factors and investors and issuers characteristics. It is also worth mentioning that macroeconomic factors (e.g. restrictions on derivatives trading (such as those imposed by the European Union in 2012) have weakened the liquidity of the underlying assets) strongly affect markets in general and liquidity in particular.