Determinants of bid-ask spread in emerging sovereign bond markets


Su E., Tokmakçıoğlu K.

Journal of Asset Management, 2023 (ESCI) identifier

  • Publication Type: Article / Article
  • Publication Date: 2023
  • Doi Number: 10.1057/s41260-023-00305-4
  • Journal Name: Journal of Asset Management
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus, ABI/INFORM, Business Source Elite, Business Source Premier, EconLit
  • Keywords: Bid-ask spread, Emerging markets, Market liquidity, Sovereign bond market
  • Istanbul Technical University Affiliated: Yes

Abstract

Major emerging market countries issue significant amounts of local currency bonds in order to finance their budget deficits. As liquidity is a substantial feature of the financial markets, understanding bond liquidity dynamics is essential. The bid-ask spread is an important measure of bond liquidity and reflects explicit transaction costs. We apply a panel regression model in order to analyze bond-level and country-level characteristics’ effects on bond liquidity and bid-ask spread. Results show that volatility, credit risk and duration have significant effects on emerging market bond liquidity. Emerging market sovereign bonds with lower volatility, lower credit risk and shorter duration have narrower bid-ask spreads, on average.