Bonds Trading at a Short Notice:
Market Liquidity in E-markets
David Dekker*1
Mary Pieterse-Bloem*, **
Rik Lustermans***
Amir Amel-Zadeh****
Dimitris Christopoulos*, *****
*Heriot Watt University
**Erasmus University Rotterdam
***Free University Amsterdam
****Oxford University
*****MU-Vienna
Acknowledgements
This research was funded by UKRI ISCF Industrial Challenge, through the UK Industrial
Decarbonisation Research and Innovation Centre (IDRIC) award number: EP/V027050/1, MIP
3.3 and MIP 3.6 under the Industrial Decarbonisation Challenge (IDC). We like to express our
gratitude to Chih-Yueh Huang for his assistance in data cleaning, preliminary analyses, and
literature review in the early phases of this research. We also thank participants of the "Risk in
Decarbonization Finance Series" (March 9th, 2023) held at Panmure House, Edinburgh, U.K.,
and those at the IDRIC 2023 annual meeting (May 16 – 17th, 2023, London, U.K.), and the
IDRIC 2024 annual meeting (March 7 – 8th, 2024, Manchester, U.K.) for their questions and
constructive feedback. We also want to thank the participants, and particularly the discussant
of the Adam Smith Sustainability Conference in Edinburgh in August 2024, for their thoughtful
comments.
Declaration of Interests
The authors declare to have no conflicting interests.
1 Correspondence: David Dekker, Edinburgh Business School , Heriot-Watt University, Edinburgh, EH14 4AS,
d.dekker@hw.ac.uk.
Market Liquidity in E-markets
David Dekker*1
Mary Pieterse-Bloem*, **
Rik Lustermans***
Amir Amel-Zadeh****
Dimitris Christopoulos*, *****
*Heriot Watt University
**Erasmus University Rotterdam
***Free University Amsterdam
****Oxford University
*****MU-Vienna
Acknowledgements
This research was funded by UKRI ISCF Industrial Challenge, through the UK Industrial
Decarbonisation Research and Innovation Centre (IDRIC) award number: EP/V027050/1, MIP
3.3 and MIP 3.6 under the Industrial Decarbonisation Challenge (IDC). We like to express our
gratitude to Chih-Yueh Huang for his assistance in data cleaning, preliminary analyses, and
literature review in the early phases of this research. We also thank participants of the "Risk in
Decarbonization Finance Series" (March 9th, 2023) held at Panmure House, Edinburgh, U.K.,
and those at the IDRIC 2023 annual meeting (May 16 – 17th, 2023, London, U.K.), and the
IDRIC 2024 annual meeting (March 7 – 8th, 2024, Manchester, U.K.) for their questions and
constructive feedback. We also want to thank the participants, and particularly the discussant
of the Adam Smith Sustainability Conference in Edinburgh in August 2024, for their thoughtful
comments.
Declaration of Interests
The authors declare to have no conflicting interests.
1 Correspondence: David Dekker, Edinburgh Business School , Heriot-Watt University, Edinburgh, EH14 4AS,
d.dekker@hw.ac.uk.
1
Abstract
This study examines liquidity in the electronic market for European corporate bonds where
trades are initiated by request-for-quotes (RFQ), building upon Hicks (1962) definition. This
study diverges from prior research, which concentrates on illiquidity price premiums, by
directly examining the "certainty" and "speed" dimensions of liquidity. It argues that "loss
avoidance" is a prerequisite for liquidity, rather than a consequence of it. Using trade
probability and time-to-trade as measures, the research disentangles liquidity dimensions to
reveal trade-offs inherent in dealer behaviour. The analysis shows that certain trade and bond
characteristics and market environments are pure liquidity indicators as they both enhance trade
probability and increase time-to-trade, but others impact these dimensions differently.
Empirical findings demonstrate the significant influence of both dealer behaviour in structuring
RFQs on electronic platforms and external response characteristics on liquidity. Our study
concludes with insights into trade outcomes and their implications for electronic corporate
bond trading platforms and their users.
Keywords: market liquidity; corporate bonds; cure models; liquidity measures; market
microstructure; dealer behavior
JEL codes: G120; G140; G41
Abstract
This study examines liquidity in the electronic market for European corporate bonds where
trades are initiated by request-for-quotes (RFQ), building upon Hicks (1962) definition. This
study diverges from prior research, which concentrates on illiquidity price premiums, by
directly examining the "certainty" and "speed" dimensions of liquidity. It argues that "loss
avoidance" is a prerequisite for liquidity, rather than a consequence of it. Using trade
probability and time-to-trade as measures, the research disentangles liquidity dimensions to
reveal trade-offs inherent in dealer behaviour. The analysis shows that certain trade and bond
characteristics and market environments are pure liquidity indicators as they both enhance trade
probability and increase time-to-trade, but others impact these dimensions differently.
Empirical findings demonstrate the significant influence of both dealer behaviour in structuring
RFQs on electronic platforms and external response characteristics on liquidity. Our study
concludes with insights into trade outcomes and their implications for electronic corporate
bond trading platforms and their users.
Keywords: market liquidity; corporate bonds; cure models; liquidity measures; market
microstructure; dealer behavior
JEL codes: G120; G140; G41
