Do Liquidity Proxies Measure Liquidity in Canadian Bond Markets?

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This analytical note evaluates the reliability of proxies for measuring liquidity in Canadian bond markets. We find that price-impact and bid-ask proxies paint a similar picture of evolving liquidity conditions to that obtained from richer measures of liquidity for benchmark Government of Canada bonds. In addition, we find that these proxies may be used with confidence to measure liquidity for bonds that transact much less frequently than benchmark bonds when the maturity of the bond is around five years or less. These results are important because the majority of Canadian bonds trade infrequently and over the counter, where there may be insufficient transactions or information to compute richer measures of liquidity. We can only use proxies to measure liquidity for these bonds.

JEL Code(s): G, G1, G12, G14, G2, G23, G3, G32