De jure benchmark bonds

Vol: 
84/2020
Author name: 
Remolona E
Yetman J
Year: 
2020
Month: 
September
Abstract: 

As the most liquid of instruments, benchmark bonds play an important role in price discovery. Where markets fail to create them, however, can governments do so? In Indonesia, Malaysia and Thailand, authorities have designated specific bonds as benchmarks. We measure these bonds’ liquidity and find that they succeed as benchmarks about 55% of the time. In contrast to the experience of large advanced markets, our estimates suggest that choosing on-the-run issues as de jure benchmark bonds is a poor strategy. Instead, what leads to success in emerging markets is choosing seasoned bonds that already have a record of superior liquidity.

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