The Liquidity of the Government Bond Market — What Impact Does Quantitative Easing Have? Evidence from Sweden

This paper uses transaction-level bond data under MiFID I and II to measure five dimensions of Swedish government bond market liquidity during the Riksbank’s QE program (2015–2020) and identifies two offsetting effects: a demand effect, whereby outright purchases temporarily improve liquidity on the day of a transaction, and a scarcity (holding) effect, whereby the accumulated stock of central bank holdings persistently reduces liquidity. Across all five liquidity measures — Turnover (TURN), Turnover Ratio (TR), Yield Impact (YI), Market Efficiency Coefficient (MEC), and Volume-Adjusted Imputed Volatility (VAIV) — the scarcity effect is statistically significant and negative for all five, while the demand effect is positive and significant for four of five. Quantitatively, the scarcity effect is five times larger than the demand effect at average holding levels, and is nonlinear: both effects are near zero when the Riksbank’s holding share is below 40 percent of outstanding bonds, but the scarcity effect on transaction costs (YI) is approximately four times larger when holdings exceed that 40 percent threshold. The Swedish Debt Management Office’s Securities Lending Facility (SLF) partially mitigates the scarcity effect on two of five measures (YI and VAIV) but not on volume-based measures.

Marianna Blix Grimaldi | Macro Paper Warehouse

The Liquidity of the Government Bond Market — What Impact Does Quantitative Easing Have? Evidence from Sweden