Measuring Bond Market Liquidity: An empirical study of the Chinese inter-bank bond market

This paper starts from the concept of liquidity, and applies principal-components analysis to construct a composite indicator of liquidity of the Chinese inter-bank bond market. The comprehensive score that results from the above-mentioned analysis overcomes shortcomings of previous single indicators that can merely cover one dimension of liquidity, and it is of great help to disclose the relationship between liquidity and the three factors, immediacy, transaction cost and transaction amount, and thus contributes to the further study on the microstructure of the Chinese inter-bank bond market. This paper also compares the liquidity of China with that of other countries in year 2005 from the two dimensions, market tightness and market depth, interpreted by the bid-ask spread and turnover respectively. The results show that there exists a large gap between the liquidity of the inter-bank bond market in China and those in developed countries.