Drivers of illiquidity in the asean sovereign bond market

Abstract

We study illiquidity in the ASEAN-5 sovereign bond markets from 2008 to 2019 by using an illiquidity measure, which is based on a proxy of the amount of arbitrage capital available in sovereign bond markets. Our analysis identifies three drivers of illiquidity in Singapore, namely economic policy uncertainty, the default spread and the gross domestic product (GDP) growth rate. In contrast, illiquidity of all other markets is mostly not characterized by economic drivers. It appears that overall liquidity is lower in the markets outside Singapore and therefore deviations in the yield curves are higher on average and arbitrage eliminates larger deviations not immediately but in a delayed manner.