A study of illiquidity Noise on International Sovereign Bonds

Abstract

This research aims to measure illiquidity noise in the international sovereign bond market, by analyzing the level of noise in our selected countries during normal times and especially during crises. The research will also focus on identifying potential arbitrage opportunities in the bond market by studying the informativeness of the noise in the price of bonds, in relation to the expected shape of sovereign yield curves. The results indicate that there is a positive relationship between our noise measure and the occurrence of crises, indicating a clear association with market illiquidity during these challenging periods. However, our analysis also uncovers multiple periods of substantial noise in our international sovereign bonds which implies more periods of illiquidity and arbitrage opportunities.