Exchanges for Government Bonds? Evidence During COVID-19

We leverage the unique institutional feature that the Israeli government bond market operates on an exchange rather than over-the-counter to analyze whether and why having an exchange affects market liquidity during a crisis. We document how the liquidity crisis in March 2020 affected the Israeli government bond market and conduct difference-in-differences analyses, comparing bid-ask spreads in exchange markets, such as the Israeli government bond market, with markets lacking an exchange. Our findings support the idea that having an exchange enhances market liquidity. A counterfactual analysis using trade data from the Israeli exchange suggests that this is due to the ability of investors to readily provide liquidity to one another and the efficient netting of trade flows on an exchange. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2023.02344 .