On The Influence Of National Debt On Treasury Market Liquidity

As an important part of China’s financial markets, the Treasury market plays an irreplaceable role in the macroeconomic operation. However, the extent of the Treasury market play to its role depends on the liquidity of the Treasury market. Although the Treasury market has made great progress in the past few decades, there’s a giant gap in terms of market liquidity between China’s Treasury market and the mature markets in the United States, Japan and Germany. There are many factors that can affect the Treasury market liquidity, the existence of Treasury futures market is an important factor affect the Treasury market liquidity. China’s Treasury futures market has been reopened on September6,2013. The impact of reopening China’s Treasury futures market on Treasury market liquidity is worthy studying.Firstly, we give an overview of Treasury futures and introduces the influence mechanism between Treasury spot and futures markets. The impact of Treasury futures on Treasury market liquidity is mainly conducted through the arbitrage between spots and futures. There are two important concepts connected with arbitrage, the conversion factor and the cheapest-to-deliverable bonds. Then, we introduce the theory of Treasury market liquidity and summarize the various measures of Treasury market liquidity. We choose traded volumes, quoted bid-ask spreads and traded frequencies as our measures of liquidity.Our data include approximately sixty-five thousand trades and two hundred thousand quotes on Treasures between January2013and January2014. The source of our data is CFETS. Based on the data, we build a panel data model to research the impact of Treasury futures on Treasury market liquidity. The empirical results show that Treasury futures have a significant impact on the Treasury market liquidity, the liquidity of deliverable bonds and the cheapest-to-deliverable bonds change significantly. However, the impact effect of Treasury futures depends on the selection of the measures of liquidity. At last, based on the empirical results and the actual situation of the Treasury market, we make some policy suggestions to improve the Treasury spot and futures markets.