The Effect of the 2006 Market Makers Reform on the Liquidity of Local-Currency Unindexed Israeli Government Bonds in the Secondary Market

20/12/2017 |  Gamrasani Inon
All Press Releases In Subject:
Finacial Markets and Financial Stability
The Effect of the 2006 Market Makers Reform on the Liquidity of Local-Currency Unindexed Israeli Government Bonds in the Secondary Market
Inon Gamrasni
Abstract
The extensive Market Makers Reform, established for local-currency unindexed Israeli Government bonds, was completed in September 2006. The paper examines whether one of the main goals of the reform—to increase the liquidity of secondary nominal government bonds—has been attained. First, the paper covers the liquidity issue, defining a set of liquidity indices that refers to market activity, liquidity cost and market depth. Second, the paper estimates the reform's impact on each of the liquidity indices. The results indicate that, although the reform did improve market activity, it did not improve either liquidity costs or market depth. The paper suggests two possible explanations: the maximum spread within the MTS system was too high, and the market-maker activity did not support the liquidity supply. In addition, the paper lays a preliminary foundation for measuring liquidity in the Israeli bond markets.