This paper analyses the part of the Danish Covered Bond Spread that can be explained by the variation in illiquidity on Danish Covered Bonds. The Covered Bond Spread is measured on the basis of both the interest rate on Government Bonds and the swap rate. We estimate six liquidity measures on the basis of transaction-level data from Nasdaq OMX. Each liquidity measure captures different aspects of liquidity. Through a Principal Component Analysis, a linear combination of four liquidity measures is made. The combined measure captures most of the liquidity related variation of spreads before and during the crisis and is used to estimate the liquidity premium on Danish Covered Bonds. We show that it is not possible to estimate a liquidity premium on Danish Covered Bonds, based on our combined liquidity measure, before the financial crisis. In contrast to this, we are able to estimate a liquidity premium on Danish Covered Bonds after the onset of the financial crisis. This shows that liquidity becomes more important after the onset of the financial crisis. The estimated liquidity premium is relatively low even during the financial crisis, which shows that even though liquidity becomes increasingly important after the onset of the crisis, the Danish Covered Bonds are still highly liquid.
|Educations||MSc in Finance and Accounting, (Graduate Programme) Final Thesis|
|Number of pages||135|