نقدینگی بازار اوراق قرضه خزانه داری اسپانیایی و نوسانات قبل و بعد از اتحادیه پول اروپا

Spain enacted a number of important debt management initiatives in 1997 to prepare its Treasury bond market for European Monetary Union. We interpret the impacts of these changes through shifts in a bond liquidity “life cycle” function. Furthermore, we highlight the importance of expected average future liquidity in explaining Spanish bond liquidity premiums. We also uncover pricing biases that support the Spanish Treasury’s tactical decision to target high-coupon, premium bonds in its pre-EMU debt exchanges. Finally, we show that EMU has been associated with both a decrease in bond yield volatility and an increase in pricing efficiency.

This paper examines liquidity and volatility in the Spanish Treasury bond market within the context of debt policy shifts engineered by the Spanish government in preparation for entrance into European Monetary Union.1 The Treasury’s mid-1997 debt management innovations were designed to make Spanish debt more attractive to the new class of Pan-European government bond investors created under European Monetary Union. These measures included (1) increases in the size of new issues, (2) increases in the time between bond issuance tranches, (3) development of a strips market and (4) institution of a new aggressive exchange policy to replace certain seasoned issues. A key purpose of this paper is to investigate the impact of Spain’s debt management initiatives on both trading activity and valuation in its debt market. As it happens, Spain’s concerns over properly preparing its markets for dramatic shifts in the relevant investor class under EMU turned out to be quite prescient. The share of Spanish government debt held by non-resident investors climbed from 25% in 1996 to 47% by February 2003.2 Analysis of Spain’s actions and experiences during these special circumstances provides a number of specific insights on market structure and policy impacts of interest to both policymakers and academic researchers. To facilitate these insights, we estimate a model that relates individual Treasury issue market share of overall trading volume to a bond’s age (the time since its initial auction) in a fashion best described as a liquidity life cycle. We then test for shifts in this liquidity life cycle function as a result of the Treasury’s debt policy innovations. We also estimate the structure of liquidity premiums in the different maturity sectors within the Spanish bond market and quantify the impacts of Spain’s EMU-related debt management policy shifts on Spanish Treasury bond valuation. We conclude by examining the impacts of European Monetary Union on volatility and pricing efficiency in the Spanish Treasury market. 1.1. Bond market liquidity proxies and model specification Liquidity is the somewhat amorphous financial market concept that embodies the ease with which a security can be traded within a short period of time without causing significant impacts on prices. Liquidity is valuable because of the associated savings of both trading costs and trading time. Theoretically, investors should require lower returns on assets with relatively high degrees of liquidity. The difference between the required return on liquid versus less liquid assets is called a liquidity premium. Issuers whose securities trade in liquid secondary markets should benefit through lower costs of capital. This effect should hold for both debt and equity securities and for both private and sovereign issuers.3 Operationally, analysis of potential liquidity effects in the cash bond markets involves choosing both a specific observable proxy for liquidity and a security valuation model. In this paper, we feature issue-specific trading volume market share and “auction status” proxies for liquidity. We test for the importance of liquidity effects by using these liquidity proxies to explain the valuation residuals from a standard term structure model. Our auction status approach attempts to follow the lead of the empirical literature for the US Treasury market, where the most recently auctioned or “on-the-run” issue in each maturity sector is distinguished from all other “off-the-run” issues. However, due to the special issuance system employed by the Spanish Treasury, we propose the need for three different status stages: “pre-benchmark”, “benchmark” and “seasoned”. 4 Furthermore, following Goldreich et al. (2005), our empirical specifications stress the importance of distinguishing between current and expected future liquidity. As it happens, this distinction is critically important for understanding liquidity in the Spanish market. In particular, the pre-benchmark Spanish Treasury bond has a low share of overall trading volume at issue, but carries an expectation of a sharply increasing future market share. In contrast, the current benchmark bond has a high current share of market trading volume, but carries an expectation of a decreasing future share of market trading volume. Our main results regarding the impacts of Spain’s debt policy changes concern both the liquidity life cycle of the typical bond and the value of liquidity. First, we show that a specific continuous, highly non-linear function of bond age explains the typical bond’s changing market share of trading volume quite well. Moreover, we confirm that important structural changes took place in the Spanish market during the approach to monetary union. In particular, shifts in the liquidity life cycle model’s key parameters after 1997 show that Spanish debt market trading activity became more concentrated in benchmark bonds and reveal that the benchmark status period lengthened. We also present a number of interesting results concerning liquidity value in the Spanish bond market. We show that our explicit life cycle function adds significant explanatory power to the literature’s standard bond auction status dummy variable approach. In particular, we use our estimated market share life cycle functions to project each issue’s future liquidity. This allows us to test for an empirical relation between bond values and liquidity, while specifically distinguishing between the impacts of current versus expected future liquidity. Our results reveal that expected future liquidity is much more important than current liquidity for explaining relative Spanish Treasury bond values. In addition, we examine the valuation impacts of bond-specific characteristics such as the coupon rate and price premiums and discounts versus par. Our results for the 1993–1997 sample period detect statistically significant valuation biases confirming that Spanish investors favored discount bonds over premium bonds. These results lend support to the Spanish Treasury’s tactical decision to target high-coupon, premium bonds in its debt exchanges. Interestingly, we find that the impact of such bond-specific characteristics on value in the Spanish market decreased after European Monetary Union. Finally, we examine the impacts of European Monetary Union on the volatility of yields in the Spanish Treasury market. As anticipated by its early proponents, European Monetary Union led to dramatic falls in both yield levels and yield volatility for “Club Med” members such as Spain and Italy. For these countries, European Monetary Union membership decreased the relevant currency translation risks as well as the perceived bond default probabilities. Formal tests here based on the first-differences of yields strongly reject the null hypothesis of equal yield variances in our pre- and post-EMU periods. Such an impact on volatility is generally acknowledged (see Codogno et al., 2003). It is less widely recognized that European Monetary Union has also led to more efficient relative pricing in the Spanish Treasury bond market. Our results reveal that the residual variance of our liquidity and bond characteristic-augmented yield regressions fell sharply between our pre-EMU and post-EMU samples. Such improved pricing efficiency may be attributed to an important byproduct of European Monetary Union: the creation of a much larger universe of euro-based fixed income investors willing to focus attention on trading opportunities in any member market without the hindrance of currency risk.

This paper has examined liquidity and volatility in the Spanish Treasury bond market in the context of debt policy shifts engineered by the Spanish government in preparation for entrance into European Monetary Union. Empirically detectable impacts of Spain s mid-1997 debt management initiatives exist for both trading activ- ity and debt market valuation. We interpret these impacts through shifts in the coef- ficients of a liquidity life cycle model relating individual Treasury bond market share to a bond s age (the time since its initial auction). Test for shifts in this market share function as a result of the Treasury s debt policy innovations clearly reject the hypothesis of no structural change in the post-initiatives sample period. We also estimate the structure of liquidity premiums in the different maturity sec- tors within the Spanish bond market. We investigate liquidity effects within a frame- work that values the lifetime flow of liquidity services and distinguishes between a security s current liquidity and its average expected future liquidity. Our empirical re- sults for 10- and 5-year Spanish Treasury bond sectors reveal statistically significant valuation impacts of expected future liquidity on current market value. Our expected future liquidity measure adds significant explanatory power to the traditional auc- tion status dummy variable approach to assessing bond liquidity value. Our results for data from 1993 to 1997 detect statistically significant pricing biases confirming that discount bonds were favored over high coupon, premium bonds. These results lend support to the Spanish Treasury s tactical decision to target high-coupon, premium bonds in its pre-EMU debt exchanges. Finally, we examine the impacts of European Monetary Union on volatility of yields in the Spanish Treasury market. First, we use our basic fitted term structures to show that the standard deviation of zero coupon bond yields declined dramati- cally after the market began pricing European Monetary Union as certain to occur. Formal tests based on the first-differences of yields strongly reject the null hypothesis of no change in variance from the pre-EMU period. Such an impact on volatility isgenerally acknowledged (and had been forecasted by EMU s early supporters). It is less widely recognized that European Monetary Union has also led to more efficient relative pricing in the Spanish Treasury bond market. Our results reveal that the residual variance of our liquidity and bond characteristic-augmented yield regres- sions fell sharply between our pre-EMU and post-EMU samples. Such improved pricing efficiency may be attributed to an important byproduct of European Mone- tary Union: the creation of a much larger universe of euro-based fixed income inves- tors willing to focus attention on trading opportunities in Spain