Market Liquidity and Bond Prices in a Small Open Economy
Abstract
ABSTRACT Investors may apply a liquidity premium to assets that are easy and cheap to trade, especially in times of stress. This paper tests for a causal relationship from market liquidity to prices in the government bond market for a small open economy (Australia). To identify this effect, I use a source of exogenous variation in liquidity that is driven by whether a particular bond is used to compute settlement prices for Australian interest rate futures contracts (“basket status”). Despite a strong link between basket status and market liquidity, I do not find clear evidence that higher market liquidity affects Australian government bond prices.
Fields of Study & Subjects
Financial Markets and Investment Strategies
Credit Risk and Financial Regulations
Banking stability
regulation
efficiency
Publication details
- Journal / source
- Financial Review
- Volume
- 61
- Issue
- 3
- Pages
- 965–977
- Publication date
- 14 January 2026
- Language
- EN