Who Drains Bond Market Liquidity in an Emerging Market?

Author/Editor:

Ricardo Hoyos ; Yang Liu ; Hui Miao ; Christian Saborowski

Publication Date:

July 24, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper examines the drivers of liquidity shortages in the Mexican government bond market. We use unique transaction- and quote level data with information on end-investors to construct an index of bond market liquidity. We find that liquidity remained stable in recent years, although temporary shortages arose amid domestic and global market stress. The analysis suggests that the largest liquidity squeezes have tended to be driven by foreign investors, whose sell-offs were especially pronounced in less liquid market segments. While domestic banks often absorbed part of the shock, other domestic investors—with the notable inclusion of domestic pension and mutual funds—appeared to take a more opportunistic stance depending on the nature of the shock.

Series:

Working Paper No. 20/141

Subject:

Frequency:

regular

English

Publication Date:

July 24, 2020

ISBN/ISSN:

9781513550824/1018-5941

Stock No:

WPIEA2020141

Format:

Paper

Pages:

32

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