A comparative analysis of drivers of secondary market liquidity in bond and stock markets after global financial crisis in Turkey

We argue that the liquidity of financial markets is one of the best indicators of financial development. Yet, the concept of liquidity is a complex one with different features. Moreover, different stakeholders have different perspectives on liquidity which makes the concept much more complex from a policy perspective. In this thesis, we investigated the drivers of secondary bond market and stock market liquidity after global financial crisis in Turkey. The literature in Turkey focused only on return volatility for driving liquidity in both bond and stock markets. However, we argued that other type of volatilities including domestic and international volatilities have also a deteriorating impact on secondary market liquidity in Turkey. In this context, we empirically tested whether the volatility and/or uncertainty that stem from the FED and ECB policies within the last 10 years had a negative impact on liquidity both in government bond and stock markets. Our results reveal that international volatilities measured by MOVE index for bond market and measured by VIX index for stock market had negative impacts on secondary market liquidity in addition to return volatilities in these markets. Similarly, FX risk which is an indicator of domestic volatilities had a negative impact on secondary market liquidity in bond and stock markets. We further analyzed the impact of non-residents in bond and stock markets on secondary market liquidity by including their holdings in stock and bond market. The results showed that as the share of non-residents increase in bond or stock markets the liquidity in these markets improves.