Market Liquidity and Bond Prices in a Small Open Economy
Year: 2026
Type: article
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.
Source: Financial Review
DOI: 10.1111/fire.70047
Author: James Brugler
Institution: The University of Melbourne
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7124148963