| Capital market liquidity has become a hot research topic in market microstructure in recent years, and associating market microstructure with classical finance (e.g., asset pricing, risk management) opens a new filed in microstructure researches. While most of related studies focus on stock markets, liquidity in bond markets has attracted more and more attention. In particular, the default event of Russian Treasury bonds in 1998 gave people more deeply learnings on bond market liquidity. This thesis, based on the special features of the Chinese bond markets, uses the theories of market microstructure, asset pricing, risk management, investment portfolios and the methods of financial market econometrics to deeply analyze the liquidity on the Chinese bond markets (in the Shanghai and Zhenzhen exchanges).First, this thesis discusses the relationships of bond pricing and the factors that associated with bond liquidity, including bond issued volume, age, term, coupon, volatility of yields, duration, convexity, year to maturity, and yield to maturity, to indirectly test the pricing effects of liquidity on the Chinese bond market. Results show that, after controlling for factors of credit and interest rates, these liquidity-related factors have insignificant and instable effects on bond pricing. The investigations on the relationship between these factors and interest rate risk, credit risk and liquidity risk show that more of these factors are associated with one of the three types of risk and thus affect bond pricing. However, they are mostly associated with bond credit risks. Particularly, in the Chinese enterprise bond market, the effects of liquidity risk on bond pricing are much weaker than that of interest rate and credit risks.Second, this thesis discussed the reason for insignificant effects of bond market liquidity on market returns from the viewpoint of flight-to-liquidity. This thesis constructs bond portfolios according to bond liquidity, and discusses within-market flight-to-liquidity respectively on the Chinese enterprise and Treasury bond markets by investigating returns correlations and liquidity premium difference between theses bond portfolios with different liquidity. Furthermore, this thesis also discussed cross-market flight-to-liquidity between the markets. Results show that within-market flight-to-liquidity between bonds with different liquidity exists on both the Treasury and enterprise bond markets. Investors will transfer their funds to bonds with higher liquidity when they observe a decline in the liquidity of their bonds. Flight-to-liquidity further increases the liquidity of high-liquidity bonds and reduces their liquidity risk. In the flight, investors tent to select bonds with higher issued volume, on-the-run, longer term, high coupon, lower volatility, and higher yield-to-maturity. After controlling for interest rate and credit risks, flight-to-liquidity between the Treasury and enterprise bond markets is insignificant.Third, the issued that whether there are cross-market effects of liquidity on returns or the reason for such a cross-market effect has not been clearly examined. This thesis investigates the cross-market effects of liquidity bond returns between the Treasury and enterprise bond markets and the reason and system of such a cross-market effect. Moreover, the relationship between macro-liquidity (monetary liquidity) and micro-liquidity (market liquidity) has been examined. Results show that there are significant effects of enterprise bond market liquidity on Treasury bond returns. The higher the price impacts (lower liquidity) on the enterprise bond market, the lower the returns on the Treasury bond market. Such a cross-market effect comes from the effects of common factors but not flight-to-liquidity between the two markets. In terms of the dynamics of the effects of common factors, liquidity on one market may directly affect returns on another market, or, indirectly, liquidity on one market affect liquidity on another market and then returns on the latter market may be affected by the change of its own liquidity. Both the within-market effects of liquidity on the Treasury bond market and the cross-market effects of enterprise bond market liquidity on Treasury bond market returns, the effects of unexpected liquidity dominate that of expected liquidity. In particular, the central bank increases the reserve preparation ratio and uses differentiating reserve system, the price impact coefficients rises and liquidity falls significantly. In the case of the Chinese bond market which has relatively low liquidity and no so many investors, the fall in liquidity may further reduce the attention of investors on liquidity, and reduce the premium effects of liquidity to be insignificant.Finally, this thesis discusses the difference in the information content of order flow between bonds with different liquidity, and examines the differences in price discovery on the Treasury and enterprise bond market and cross-market flight. Results show that bond liquidity may significantly affect the information content of order flow. Bonds with higher liquidity may have higher information content of order flow and higher efficiency of price discovery. The mostly-active traded 7-year and 10-year bonds have the highest efficiency of price discovery. Their order flow not only affects the Treasury bond market returns, but also the enterprise bond market returns. After controlling for the effects of order flow on these two types of bonds, order flow for all other bonds is insignificant. There is significant lead-lag relationship for both returns and order flow between the two bond markets. There is a channel effect of the Treasury bond market. That is, the effects of common factors may firstly affect the Treasury bond market, and through the channel effect of the Treasury bond market, the effects of common factors will be transferred to the enterprise bond market. After the effects of such lead-lag relationships are controlled, there is a insignificant relationship between the order flow on the Treasury bond market and returns on the enterprise bond market, and evidence of flight between the two bond markets is also found.
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