Liquidity Drivers on the Covered Bond Market

Abstract

This paper analyzes the drivers of bond market liquidity. The use of a unique data set of global covered bonds allows to reveal three effects which have not been in the focus before: primary market supply, initial demand and allocation, and seasonality. Liquidity is elevated around the issue dates of paper from the same issuer or the same country. Liquidity is higher if investor interest during the bond's initial offering (IPO) is large and if the allocation is biased towards investors with a higher propensity to trading in secondary markets. While liquidity is higher at the start of the year and around the turn of the month, it is lower towards quarter and year ends. Familiar liquidity factors such as bond size, age and risk drive long-term liquidity, but the new ones are likewise important. Supply and seasonality are crucial determinants in the short run as they markedly influence liquidity in specific weeks. Demand and allocation during the bond IPO are interesting since they are affected by market participants.