The bond market plays a very important role in the financial systems of our economies. Bond markets bring lenders and borrowers together. They allow lenders to invest in relatively low risk assets and borrowers to obtain funds in relatively liquid markets.

Bond markets are important in determining the prices of other assets, and bank interest rates usually follow market-determined interest rates on bonds. The prices determined in the bond markets affect household decisions to save and the corporate sector’s investment decisions.

In the United States, the bond market is about the same size as the stock market (Figure 1, Panel A). In Europe, bonds amount to approximately two-thirds of the total amount of securities outstanding (Figure 1, Panel B). But the distribution of the total debt differs significantly between Europe and the United States. In Europe, the bond market is dominated by government bonds and bonds issued by financial intermediaries. In the United States, the proportion of bonds issued by the non-financial corporate sector is much larger. In addition, municipal bonds and agency bonds are major components of this market.

A market so important should operate well. For the bond market, this means both efficiency and liquidity. Efficient bond prices, incorporating all available information, will be better signals to investors and savers than if the markets did not incorporate relevant information fully into prices. Liquid bond markets bring transactions costs down for investors, who therefore achieve greater gains from trade, and they minimise the cost of funds to firms.

Despite the key role of the bond markets, there has been much less academic attention devoted to bond markets than to equity markets. The big gap is in empirical work, and the main reason for this is data availability. Since the 1990s, several stock exchanges (including the London Stock Exchange, the New York Stock Exchange, and the Paris Bourse) have disseminated rich, high-frequency data. Many academic studies have relied on these datasets to illuminate the operation of the stock markets. We now have well-defined measures of transactions costs (e.g., the effective spread – see below), and numerous empirical studies documenting the consequences of several features of the design of these markets (for a survey, see Biais, Glosten and Spatt, 2005).

In contrast, there are only a few studies on the bond market, most of these on US Treasuries. But this market is extremely liquid and active, and liquidity is likely to be very different in this setting than for corporate and municipal bonds. ...

Download European Corporate Bond Markets: transparency, liquidity, efficiency

PDF format, 1.11MB, 81Pages. Provided by abi.org.uk. May 2006

Bruno Biais, University of Toulouse and CEPR
Fany Declerck, University of Toulouse
James Dow, London Business School and CEPR
Richard Portes, London Business School and CEPR
Ernst-Ludwig von Thadden, University of Mannheim and CEPR

City of London
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www.cityoflondon.gov.uk/economicresearch

The City of London Corporation

The City of London is exceptional in many ways, not least in that it has a dedicated local authority committed to enhancing its status on the world stage. The smooth running of the City’s business relies on the web of high quality services that the City of London Corporation provides.

Older than Parliament itself, the City of London Corporation has centuries of proven success in protecting the City’s interests, whether it be policing and cleaning its streets or in identifying international opportunities for economic growth.

It is also able to promote the City in a unique and powerful way through the Lord Mayor of London, a respected ambassador for financial services who takes the City’s credentials to a remarkably wide and influential audience.

Alongside its promotion of the business community, the City of London Corporation has a host of responsibilities which extend far beyond the City boundaries. It runs the internationally renowned Barbican Arts Centre; it is the port health authority for the whole of the Thames estuary; it manages a portfolio of property throughout the capital, and it owns and protects 10,000 acres of open space in and around it.

The City of London Corporation, however, never loses sight of its primary role – the sustained and expert promotion of the ‘City’, a byword for strength and stability, innovation and flexibility – and it seeks to perpetuate the City’s position as a global business leader into the new century.

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