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Corporate Bond Market Liquidity in Israel at Heterogeneous Trade Size
Jan 01, 2011
Dustin Plotnick and Dr. Gitit Gur-Gershgoren
Publisher: Koret-Milken Institute Fellows Program

The Israeli corporate bond market is highly transparent and predominantly traded on the Tel Aviv Stock Exchange (TASE) continuous limit order book.

By contrast, corporate bond markets in the U.S. and Europe are structured as dealer-based over-the-counter (OTC) markets; there is little-to-no volume on the exchanges, even for exchange-listed bonds. Legislators in the U.S. appear to prefer exchange trading; in the wake of the crisis, they are presently trying to move derivatives markets from OTC trading to the exchange. In Europe there is at least some interest in doing the same for the corporate bond market. However, exchange trading is not necessarily superior to OTC trading.

This report from the Koret-Milken Institute Fellows Program highlights the relevant issues for assessing market quality in Israel and puts forward a detailed empirical analysis of the liquidity of the tradable corporate bond market in Israel. It provides an overview of the structure of the Israeli bond market, descriptive statistics regarding the limit order book and an examination of liquidity on the limit order book at heterogeneous trade sizes. It also examines liquidity "down the book" for a broad sample of Israeli bonds for an extended period of time.

The authors analyze a large sample of bond securities for March 2009 and January 2010, and, for reference, down-the-book liquidity for TASE-traded equity securities in January 2010. They conclude that down-the-book liquidity measures do contribute additional information to investors in a sample of equities but not in a sample of bonds.