Research On The Liquidity Measures, Factors Influencing Liquidity And Liquidity Premiums Of Chinese Treasury Market

Treasury has both fiscal and financial functions. Treasury, as a financial tool, boosts the development of treasury market and makes it an important part of the financial system. The improvement of liquidity of treasury market helps to strengthen its foundational status, and enhance the functions of treasury market on risk management, valuation and resource allocation. Because the finance market system has been just established in China, the research on liquidity helps to foster and improve the treasury market and then stimulate the whole finance market system to enjoy healthy and steadily development.The oversea literatures tell us there are three main directions regarding the research on treasury market liquidity, which include the design of liquidity measure, the analysis on elements which affect liquidity, the analysis on liquidity premiums. The oversea literatures pay much attention to developed countries, and focus on quote-driven trading system with market makers. The domestic research has not formulated a comprehensive framework yet. Most domestic researchers are not familiar with Chinese Treasury Market, and are short of reliable first-hand data, systematic liquidity measure designing methodology, comprehensive analysis on influence elements and liquidity premiums. The research on Chinese Treasury Market is a very urgent task, facing the complicated system, weak liquidity and changing policies. Our research should take into consideration the special structure of Chinese Treasury Market, and identify the strategic direction of market development, the rules of liquidity movement, and the way to increase the efficiency of financial resource allocation.The first purpose of this dissertation is to design suitable liquidity measures, which will facilitate the theoretical study and operation when measuring the liquidity of Chinese Treasury Market. The second is to deeply analyze the factors influencing the liquidity of Chinese Treasury Market, and provide powerful proofs for studying the causes of the change of liquidity and finding some effective methods for sustaining and improving liquidity. The third is to discover the inherent relationships between liquidity and price or yield to maturity, through the research on liquidity premiums, then help the issuer to reduce the financing costs and help the investors to avoid investment risks. The Treasury Market in Shanghai Stock Exchange and the Interbank Treasury Market are the two main parts of Chinese Treasury Market. The object of this dissertation is the liquidity measures, factors influencing liquidity and liquidity premiums of the two markets.The basic theory of this dissertation is based on the viewpoints of Harris(1990)[3]concerning the dimensions of liquidity, the viewpoints of BIS(1999)[4] concerning the factors influencing the liquidity of treasury market, and the viewpoint of Amihudå’ŒMendelson(1991)[5] concerning the liquidity premiums due to discounted trading costs. During the course of demonstrating, with the cross-sectional, time-serial and panel data, this dissertation adopts many statistical models and methods, including of Spearman's Rho Test, Wilcoxon Test, Linearity Regression Model, AR(1) Model, GARCH(1,1) Model, EGARCH(1,1) Model, PDL-GARCH(1,1) Model, VAR Model, ADF Test, Impulse Response Curve, Granger Cause Test, and Panel Data Model with fixed effects and different intercept. This dissertation also sums up all the domestic and overseas researches on the liquidity of treasury market.Liquidity of Treasury Market means the capability of treasury market which supports the exchange of treasury and currency. Better liquidity means trading on certain amount can be finished within relatively short time, while the treasury price keeps stable simultaneously. According to the analysis on the designing methodology, advantages and shortcomings of those existed liquidity measures, and taking into consideration the four dimensions of liquidity, this dissertation designed Width, Depth, Resiliency, and Composite Liquidity Measure for the Treasury Market in Shanghai Stock Exchange and the Interbank Treasury Market. The design of Width and Depth uses high frequency data, and the design of Resiliency and Composite Liquidity Measure uses daily data. The Composite Liquidity Measure is designed for the first time in this dissertation. The data of this dissertation include 43 bonds in the Treasury Market in Shanghai Stock Exchange and 33 bonds in the Interbank Treasury Market, with the period from July 21, 2003 to December 31, 2006.The conclusions of this dissertation are as follows:Firstly, it is the better to use different measures to illustrate the liquidity of the Treasury Market in Shanghai Stock Exchange and the Interbank Treasury Market. The liquidity measures of the Treasury Market in Shanghai Stock Exchange have strong correlating relationships both with cross-sectional and time-serial data, while the liquidity measures of the Interbank Treasury Market have strong correlating relationships with time-serial data and weak relationships with cross-sectional data.Secondly, Product Structure influences the liquidity of Chinese Treasury Market. The Benchmark Effect and the Dynamic Product Effect exist. Within the Treasury Market in Shanghai Stock Exchange and the Interbank Treasury Market, the liquidity of Benchmark group is better than that of Non-benchmark group. Within the Treasury Market in Shanghai Stock Exchange, liquidity focuses on bonds with long remained maturity. While within the Interbank Treasury Market, bonds with short maturity enjoy better liquidity. Within the both markets, bonds with short distance to interest paying day and premium trading price over par value enjoyed better liquidity.Thirdly, Investors'Behavior influences the liquidity of Chinese Treasury Market. The On-the-run Effect and the ARCH Effect exist. Within the Treasury Market in Shanghai Stock Exchange, those bonds with initial maturity of 7 or 10 years enjoy the On-the-run Effect. Within the Interbank Treasury Market, those bonds with initial maturity of 7, 2 or 5 years enjoy the On-the-run Effect. There is strong volatility clustering with the liquidity of Chinese Treasury Market. The investors'behavior influences not only the future liquidity but also the volatility of future liquidity. Furthermore, the investors'behavior shows asymmetry, facing opposite trend of liquidity. When the liquidity becomes better, the investors'behavior influences Width and Resilience Measure to be less, and Depth and Composite Liquidity Measure to be larger.Fourthly, Market Segmentation influences the liquidity of Chinese Treasury Market. The Market Segmentation Effect and the Transmarkets Interaction Effect exist. The Width and Resilience Measures are lower in the Treasury Market, while the Depth and Composite Liquidity Measures are higher in the Interbank Treasury Market. All the time-serial data of liquidity measures are I(1) process. The liquidity of both markets impacts each other consistently. The liquidity of one market is able to stimulate and also weaken that of the other market. The liquidity of the Treasury Market of Shanghai Stock Exchange impacts that of the Interbank Treasury Market more intensively in short term. Those Liquidity Measures related to price in the Treasury Market of Shanghai Stock Exchange and those Liquidity Measures related to quantity in the Interbank Treasury Market, reflect higher effect during the interaction. The liquidity of one market is the Granger Cause of the other. Furthermore, the liquidity of the Treasury Market of Shanghai Stock Exchange affects the other market more intensively.Fifthly, Currency influences the liquidity of Chinese Treasury Market. In the Treasury Market of Shanghai Stock Exchange, the repo of Shanghai Stock Exchange stimulates the liquidity, while the repo of Interbank Market has no effects. In the Interbank Treasury Market, the repo of Interbank Market stimulates the liquidity, while the repo of Shanghai Stock Exchange has lower effects. At the mean while, the repo of the two markets affects the fluctuation of liquidity and has opposite functions. Within the Treasury Market in Shanghai Stock Exchange, the trading of A share would attract currency flow into the stock market, then reduces the supply of currency to the treasury market, which weakens the liquidity. In the Interbank Treasury Market, the trading of A share would not affect the liquidity but affects the fluctuation of liquidity, which makes the Liquidity Measure related to price fluctuated more intensively and makes the Liquidity Measure related to quantity fluctuated less intensively. The issue amount of the Central Bank Paper could not affect the liquidity of the two treasury markets dramatically. In the Treasury Market of Shanghai Stock Exchange, the issue amount of the Central Bank Paper is able to weaken the liquidity at certain extent and the duration will be 1 to 3 weeks. In the Interbank Treasury Market, the influence of the issue amount of the Central Bank Paper is quite weak at the current stage.Sixthly, Liquidity Premiums exist in Chinese Treasury Market. This dissertation compares two bonds with the same term structure and establishes a linearity regressive model. It is found out that the difference of Width and Composite Liquidity Measure has high influence on the difference of yield to maturity, which testifies the liquidity premiums. This dissertation introduces the Liquidity Measures into the GARCH models which describes the yield to maturity of bonds with 7 years maturity. It is found out that Width and Resilience Measure had high influence on the yield to maturity. The better the liquidity is, the less the Width and Resilience Measure will be, and the lower the yield to maturity will be. Most Liquidity Measure would stabilize the fluctuation of yield to maturity. This dissertation testifies that all the time-serial data of the liquidity measures and the yield to maturity of bonds with 7 years maturity are I(1) process. The liquidity measures and the yield to maturity impact each other consistently. In the Treasury Market of Shanghai Stock Exchange, the yield to maturity reacts at the coming of the impulse of liquidity and keeps consistent in very short time. In the Interbank Treasury Market, the yield to maturity reacts at 1 lag and keeps consistent in longer time. In the Treasury Market of Shanghai Stock Exchange, liquidity premiums exist with all the liquidity. While in the Interbank Treasury Market, liquidity premiums only exist with Width. Facing the impulse from the yield of maturity, the reaction of the liquidity measures is more intensive at 3 to 6 lags, and the number of lags in Shanghai Stock Exchange is lower than that in Interbank Market. This dissertation also carries out Granger Cause Test, which shows that the Width Measure is the Granger Cause of the yield to maturity, the Resilience Measure and the yield to maturity are interacted with each other, and Depth and Composite Liquidity Measure are not the Granger Cause of the yield to maturity.This dissertation gives four suggestions. Firstly, the liquidity of the Treasury Market of Shanghai Stock Exchange is independently at a certain extent. The weakness of the liquidity in this market has been affecting Chinese Treasure Market negatively. But the Interbank Market still can not replace the Treasury Market of Shanghai Stock Exchange in thoroughly. We should develop the strength of the two markets, and establish a market system which can satisfy different demand from investors through the integration of deposit system and investors with different trading and clearing mechanism. Secondly, due to the several dimensions of liquidity, different quality of basic data, difference between the two markets, and the different demands from investors, several liquidity measures are more reasonable for measuring the liquidity of Chinese Treasury Market. Thirdly, we should combine several methods together to improve the liquidity, which include enlarging the scale of the treasury market and adjusting the product structure, consolidating the investors, and adjusting the investors'structure, exploring mixed trading mechanism and reforming trading rules. We also should pay attention to the influence of currency on the liquidity, which include stimulating the currency supply to the treasury market through repo, reducing the negative effects from stock market, and the Central Bank Paper. Fourthly, financing through treasury market or investing in the treasury market, should take into account the liquidity premiums. Especially in the Treasury Market of Shanghai Stock Exchange, the issuer could lower the financing cost when the liquidity is better, but should be careful of the negative effect from liquidity impulse. Those investors in the Treasury Market of Shanghai Stock Exchange should consider the influence of liquidity on price and yield to maturity.This dissertation has carried out innovative efforts as follows:Firstly, this dissertation has explored more details in the designing methodology of the Liquidity Measures for Treasury Market. Based on the existed designing methodology, the several dimensions of liquidity, and the characteristics of treasury trading, this dissertation designs a new liquidity measure, named as Composite Liquidity Measure, and applies it into the whole research. The process of research and results shows that this measure is clearly defined, and easy for data collection and application. This dissertation also improves some existed liquidity measure, for example, in Shanghai Stock Market, the Depth has been amended using the information from all the order places.Secondly, based on the angle of liquidity measures and factors influencing liquidity, this dissertation makes efforts to enhance the unification of the research on the liquidity of Chinese Treasury Market, then change the status that many study only focus on the Treasury Market in Shanghai Stock Exchange or the Interbank Treasury Market. During the course of designing the liquidity measures, this dissertation removes the obstacles of complicated structure and data collection, and carried out uniform and normative data processing, .then design all the liquidity measures for the both markets. During the course of analyzing the factors influencing the liquidity, this dissertation unified the both markets into one research framework, and demonstrates the influences of the Product Structure, the Investors'Behavior, the Market Segmentation and Currency on the liquidity.Thirdly, this dissertation analyzes the liquidity premiums with new thinking. For example, this dissertation analyzes the dynamic relationship between the Yield to Maturity and the Liquidity Measures by using VAR Model, then demonstrates the liquidity premiums and the influence of Yield to Maturity on the Liquidity Measures.