Investigating Liquidity in a Frontier Government Bond Market: The Case of Bucharest Stock Exchange

Abstract

Liquidity is an important feature for any domestic bond market, being associated with a well organized market. A liquid secondary government bond market must be of interest for any frontier economy policy-makers given the important benefits. The present paper is the first to investigate the liquidity of government bond secondary market in Romania, included in the subgroup of frontier securities market. The paper use multivariate empirical analysis using the data set available at Bucharest Stock Exchange for the period August 2008, when the secondary market for government bonds was launched, and December 2013. Since this is the first paper trying to measure the liquidity of BVB government bond market segment, a high number of proxies were first selected in order to capture all the liquidity dimensions. Also five factors were identified to influence the majority of these proxies. In the end, four factors of the initial five proved to have an increased explanatory power over the liquidity proxies. Further, the number of twelve liquidity proxies should be reduced and a PCA was conducted in order to extract a smaller number. The final result indicates a number of four liquidity proxies that captured in a satisfactory manner all the liquidity dimensions. The results suggests that the Romanian Ministry of Finance should pay a special attention to these four proxies and to the idemtfied factors influencing them in order to increase the government bond segment liquidity at Bucharest Stock Exchange.