Russian government bonds yield modeling with nonresidents share factor as a source of liquidity

Abstract

Government bonds liquidity plays an important role in the financial market development of the country. Decreasing the investing risk, a stable functioning government bonds market has a significant impact on the economic development. Stability of trading on the market, in turn, is achieved by the active investor base expanding. The paper explores the impact of liquidity proxies and foreign participation in determining Russian local currency government bond yield. Several liquidity measures were examined to identify the most powerful liquidity proxy. They are trading frequency, market turnover ratio and bid-ask spread. Liquidity and non-residents activity impact in bond yield was estimated with a panel regression model with random effects. The analysis was based on government bonds stock exchange trades statistical data from 2009 to 2016. The results of a panel data analysis show that both liquidity and non-residents trading activity has a statistically significant impact on the bonds yield determination. An increase in liquidity and foreign participation share in the domestic government bond market lead to significant reduce in government bonds yield. In addition to the significant relationship existence verification, the best liquidity measure was determined. The bid-ask spread shows the most significant explanatory power in bonds yield determination. Finally, impacts of liquidity and non-resident share in bonds yield were assessed separately from each other. An increase in bid-ask spread by 1 percentage point lead to yield spread increase by 0.03 pp. With an increase in the non-residents trade share by 1 percentage point, the yield spread decreases by 0.02 percentage points. Therefore, these results allow private and institutional investors maximize their portfolio profitability. Moreover, this piper is the first analysis in Russian practice that explores not only the classic liquidity proxies, but also discovers the impact of a new factor: the qualitative composition of investors’ base. Therefore, the presented analysis can serve as a stimulus to the development of a new direction in liquidity research: consideration of the investors’ composition (the share of individuals, banks, institutional investors) as a factor of financial assets yield.