Drivers of Liquidity in the EU Corporate Bond Market

Paper available here.

This report for the European Commission provides comprehensive evidence on the evolution of market liquidity in the European corporate bond market.
The analysis is based on substantial datasets including MiFID 1 data provided by the FCA, transactions data from a leading Electronic Trading Platform (ETP), settlement data from a major clearing organisation, Euroclear, and large historical datasets of bond characteristic and quote information.

Activity-based indicators (such as turnover rates and trade numbers) suggest that liquidity has deteriorated in recent years. Price-based indicators (for example, bid-ask and effective spreads, round trip measures and market depth indicators) point to some recovery in liquidity after the crisis but deterioration after 2014. Conditional on the riskiness of individual bonds, both price and activity measures show declines in liquidity since 2011, suggesting a structural deterioration in liquidity.

The report also looks at various drivers of liquidity. These include (i) long-run structural  influences such as the growth of Electronic Trading Platforms (ETPs) and MiFID 2 changes in  pre- and post-trade transparency, and (ii) changes in market-maker profitability as evidenced by round trip measures and dealer inventories.  We compare the timing of changes in liquidity with regulatory developments.