Liquidity Premiums between Treasury Asset Markets

This paper examines the factors which explain the liquidity premium in the Spanish government securities market. First, we study the degree of liquidity and the relationship to the factors it depends on, observing the differences between two kinds of assets, bills and notes, and between two markets that can be considered as retail market (the Electronic Stock Exchange, ETS) and wholesale market (the Bank of Spain’s book entry system, MDPA). Our study reveals the convenience of splitting up the life of bonds into three different stages: prebenchmark, benchmark and seasoned. Second, we analyse the spreads between yields at which bonds and bills are traded the same day in the ETS and in the MDPA. Liquidity premiums between both markets can be explained by two sorts of variables. There is a set of variables that captures the idiosyncrasy of each issue, mainly the age, and other set of variables that captures some specific features of the ETS market that may give rise to additional liquidity premiums.