Strengthening Primary Dealer Obligations and Government Bond Liquidity: An Empirical Analysis of Policy Effects

This study investigates the impact of the Primary Dealer (PD) obligation enhancement, introduced in October 2010 as part of the “Government Bond On-Exchange Trading Activation Plan,” on government bond market liquidity. Although the policy aimed to strengthen market liquidity, empirical analysis of its effectiveness has been limited. Using both on-exchange and over-the-counter (OTC) transaction data from 2003 to 2024, and controlling for key macroeconomic variables, the study applies a conditional heteroskedasticity model to examine changes in liquidity. The results show that illiquidity significantly declined for 5- and 10-year government bonds following the policy change, indicating improvements in structural market stability and trading activity. In addition, the PD obligation enhancement contributed to liquidity improvements even during benchmark bond replacement periods. These findings provide empirical evidence of the positive and lasting effects of policy-driven institutional changes on government bond market liquidity.