Research On The Liquidity Effects Of The Government Bonds Market Of China

Since the Asian Financial Crisis, people began to pay attention to thefinancial function of the government bonds. Policymakers have becomeincreasingly concerned about the negative influence because of theabsence of broad, deep, resilient bond markets. Hong Kong andSingapore has succeeded in fostering development of an activefixed-income market in Exchange Fund Bills and Notes even though thegovernment has not run significant deficits. U.S.A has suffered a set ofeconomic consequences of declines in government debt because of itsfinancial surpluses. All of these have implied that issuing governmentbonds is not only a financial issue, but also a considerable financial issue.For China, being in the time of financial system reform, It is veryimportant to get rid of the narrow thought that government bonds is onlythe means of remedying the financial deficit, and to keep the harmoniousdevelopment between government bonds market and economy. Nowaday, Chinese researchers and policymakers have done much useful work onthe government bonds in macro perspective. But there is little work aboutresearch in the government bonds and its liquidity effects in microperspective. Therefore, this paper try to analyze the function of thegovernment bonds as a financial asset with high liquidity from microperspective and explain the necessity of building the government bondsmarket into core financial market. We hope that this will provide somereference to make the government bonds policies.This paper is divided into six parts including the introduction.The introduction part deals with the significance of the selected topic,the review and comment of relevant document, articles and research,content, research method and innovations.The second part mainly introduces the academic fundament of theexistence of the government bonds' liquidity effects. At first, we pointthat market liquidity has externality, and the government bonds as afinancial tool with high liquidity can be the means of improving marketliquidity. Then, we analyse the unique characters of the liquidity of thegovernment bonds, which are its strongest self-fulfillment amongfinancial assets and exogenesis. This is a theoretical base for our paper.In the third part, we analyze the practice of using the governmentbonds' liquidity effects in financial market. To explain this, we divided itinto three parts. Firstly, we explore the government bonds' effect of improving the efficiency of pricing financial assets. Secondly, we analysehow it improves financial market's liquidity. At last, we discuss itsfunction of improving the efficiency of investment portfolio and perfecttrades' investment opportunity.In the fourth part, we build a theoretical model to reveal themechanism of liquidity impact of the government bonds to improve theefficiency of other financial market.Next, We use the data from Jan.2001 to Jan.2005 from Shanghaisecurity exchange to testify the externality of the government bondsmarket by the event-study analysis in the fifth part.Based on all the above research, the last part lays stress on pointingout some policies and suggestions of improving the liquidity of thegovernment bonds market in China.