Liquidity in covered bond markets : How liquid is the Norwegian secondary market?

Abstract

In this paper, we study the liquidity in the Norwegian secondary covered bond market, in comparison to other Scandinavian covered and government bond markets. We have gathered data on trades and bonds in the markets from market participants and Financial S upervisory Authorities in the relevant countries, a process that can be characterized as challenging and time consuming. We discuss how new regulations , the reversal of the Government Swap Agreement and the introduction of the Norwegian Covered Bonds Bench mark has affected liquidity. Further, we investigate any differences in liquidity with in the Norwegian covered bond market. The research is conducted by implementing different liquidity measures that together allow for thorough research of liquidity in the markets we focus on . Overall, we find that the liquidity in the Norwegian secondary covered bond market is neither higher nor lower than the liquidity in the comparable markets , even if there are important differences between some markets . Looking at dif ferent groups of bonds in the Norwegian covered bond market, we conclude that the larger bonds included in the Covered Bond Benchmark have the highest liquidity. Over the last years, the liquidity in the Norwegian covered bond market has improved considerably along with the growth of the market. From an unstable period with few bonds in the market in 2007 and 2008, all measures point at higher liquidity from 2010/ 2011 in more stable market conditions. We have not been able to prove what part new regul ations and the reversal of the swap a greement have played in the development, but we have some evidence for higher liquidity due to the implementation of the Covered B ond Benchmark.