The quality of bond markets the dynamic efficiency issue

This paper combines information efficiency with the economists’ usual sense of the word “efficiency”, i.e. the allocation of resources to their most profitable expected use and at the lowest cost in terms of resources employed. The paper addresses dynamic efficiency, the ability of a particular national market to respond to demand for financial innovations developed elsewhere with a short as possible lag. A measure of dynamic efficiency is proposed that contains two dimensions. One of these catches the speed with which innovations developed in one market is adopted by another market. The other expresses the current status of the market in terms of how far behind the ideal market a particular market is. The measure of dynamic efficiency is a relevant indicator of a high quality secondary bond market. Hence, the measure should be of particular relevance to issuers of long-term bonds. Using Nordic markets case studies it is shown that they are catching up in terms of dynamic efficiency.