Market Liquidity: Research Findings and Selected Policy Implications

CGFS Publications No 11
May 1999



This report is the result of a coordinated research effort by the central banks of Canada, Italy, Japan, the United Kingdom and the United States and the Bank for International Settlements on the determinants of market liquidity and on how central banks and other public authorities influence these determinants. Following a decision by the Euro-currency Standing Committee (now the Committee on the Global Financial System) in December 1997, a group of central bank economists and market analysts, under the chairmanship of the Bank of Japan, conducted this research from February 1998 to March 1999. As part of the study, staff from the central banks and/or government debt offices of all of the G-10 countries participated in a survey on the structure of government securities markets. The report consists of an overview note (Part 1) and eighteen individual papers on various aspects of market liquidity (Part 2). The overview note is the result of extensive discussions among the members of the study group, taking into account insights obtained from the individual papers. An appendix to Part 1 summarises the results of the government securities market survey. The individual papers provide the theoretical and empirical bases for the discussions of the study group.

Part 1.

Part 2. Individual papers

1. Conceptual Studies of Market Liquidity

  • Dupont, D. : The Effects of Transaction Costs on Depth and Spread.(PDF, 9 pages, 133639 bytes)
  • Gravelle, T. : The Market Microstructure of Dealership Equity and Government Securities Markets: How They Differ. (PDF, 18 pages, 128338 bytes)
  • Muranaga, J. and Shimizu, T. : Market Microstructure and Market Liquidity. (PDF, 29 pages, 287062 bytes)
  • Ui, T. : Transparency and Liquidity in Securities Markets.(PDF, 18 pages, 144241 bytes)

    2. Empirical Studies of Market Liquidity

    2.1 Comparative studies


  • Fung, B.S.C., Mitnick, S. and Remolona, E. : Inflation Expectations and Risks in a Two-Country Affine-Yield Model. (PDF, 25 pages, 174570 bytes)
  • Gravelle, T. : Liquidity of the Government of Canada Securities Market: Stylised Facts and Some Market Microstructure Comparisons to the United States Treasury Market. (PDF, 38 pages, 408570 bytes)
  • Inoue, H. : The Structure of Government Securities Markets in G10 Countries: Summary of Questionnaire Results. (PDF, 22 pages, 193371 bytes)
  • Inoue, H. : The Stylised Facts of Price Discovery in Government Securities Markets: A Comparative Study. (PDF, 35 pages, 462886 bytes)
  • McCauley, R.N. : The Euro and the Liquidity of European Fixed Income Markets. (PDF, 28 pages, 162597 bytes)

    2.2 Country-level studies


  • Clare, A., Johnson, M., Proudman, J. and Saporta, V. : The Impact of UK Macroeconomic Announcements on the Market for Gilts. (PDF, 17 pages, 153672 bytes)
  • Fleming, M. and Sarkar, A. : Liquidity in U.S. Treasury Spot and Futures Markets. (PDF, 15 pages, 91133 bytes)
  • Higo, H. : The Change of Liquidity in the Life Cycle of Japanese Government Securities. (PDF, 22 pages, 178355 bytes)
  • Muranaga, J. : Dynamics of Market Liquidity of Japanese Stocks: An Analysis of Tick-by-Tick Data of the Tokyo Stock Exchange. (PDF, 26 pages, 328695 bytes)
  • Scalia, A. and Vacca, V. : Does Market Transparency Matter? A Case Study. (PDF, 28 pages, 610089 bytes)

    3. Market Operations and Market Liquidity


  • Cohen, B. : Monetary Policy Procedures and Volatility Transmission along the Yield Curve. (PDF, 23 pages, 168781 bytes)
  • Inoue, H. : The Effects of Open Market Operations on the Price Discovery Process in the Japanese Government Securities Market: An Empirical Study. (PDF, 22 pages, 188324 bytes)

    4. Market Liquidity under Stress


  • Miyanoya, A. : Price Discovery Functions in Japan's corporate bond market: An Event Study of the Recent Fall 1997 Financial Crisis. (PDF, 30 pages, 916594 bytes)
  • Muranaga, J. and Shimizu, T. : Expectations and Market Microstructure When Liquidity is Lost. (PDF, 15 pages, 555955 bytes)