Liquidity in the Norwegian and Danish Covered Bond Markets: An empirical study comparing the liquidity in the secondary covered bond markets in Norway and Denmark from 2010 to 2021

Abstract

In this paper, we analyze and compare the liquidity in the Norwegian and Danish secondary covered bond markets using transaction data from 2010 to 2021. With sparse transaction data, measuring liquidity in the two markets is no easy exercise. We employ two trading activity variables and two liquidity measures suitable for the data available. Although the bond market in Norway is generally seen as less liquid compared to other markets, we do not find sufficient evidence to conclude that the liquidity in the Norwegian covered bond market is lower than the Danish. In addition, our study investigates how liquidity in the two covered bond markets is affected during stressed market periods. In Norway, we conclude that the market liquidity is significantly worsened during stressed market periods compared to normal market periods. We do not find sufficient evidence for a similar conclusion in Denmark.