Market Segmentation State Bond Liquidity

At present, our country's bond market is still in the state of segmentation. Market segmentation will lead to a series of problems, especially damage market efficiency. So, building a unified bond market has become our top priority to strengthen and improve our financial system. Inter-bank bond market and Fixed-income Trading System are the most important components of Chinas bond market, and play an important role in our financial system. It is worthy of our study that, under the same trading system conditions, can we firstly fulfill the integration of the two markets and ultimately construct a unified bond market.The successful integration of two markets crucially depends on the quality and efficiency of the two markets. As proved, the integration of two markets with the same quality and efficiency has the minimal negative effect. Liquidity is one of the most important indictors to measure the quality and efficiency of financial market, and the core contents of financial market microstructure study. Amihud and Mendelson(1986) even pointed out that"liquidity is the all of market, and the soul of market."Studying on liquidity as the staring point, this paper compare and analysis the difference of the two market liquidity, and further study the reason that cause the difference and the short-term interaction between the two market liquidity.The results indicate: firstly, the two market liquidity indicators are not subject to the same distribution. Liquidity difference caused by market segmentation is significant. Secondly, the factors that affect the two markets are not the same. Inter-bank bound market is more sensitive to the change of bound market and not sensitive to the change of stock market. Otherwise, Fixed-income Trading System is more sensitive to the change of stock market and not sensitive to the change of bond market. Long-term bond's yield to maturity has a significant effect on the liquidity of Inter-bank bound market ,but has no significant effect on the liquidity of Fixed-income Trading System. Thirdly, the two market liquidity has a significant interaction relationship in short term. Fixed-income Trading System is Granger causality of Inter-bank bond market. Fixed-income Trading System reacts more quickly on new market information than Inter-bank bound market. However,Fixed-income Trading System liquidity change has a lag impact on the Inter-bank bound market. This is mainly due to the current scale of cross-market arbitrage funds are limited. Although the Inter-bank bond market do not react as quickly as Fixed-income Trading System on new market information, the Inter-bank bond market liquidity change represents the macro liquidity of the entire financial market. So, the Inter-bank bond market liquidity change has a significant impact on Fixed-income Trading System.