Effektivitet på det danske obligationsmarked

Hüseyin Meric & Robin Sørup

Student thesis: Master thesis


The subject of this master thesis is to investigate the efficiency of the Danish bond market. The primary question that will be answered is “whether the Danish bond market is effective, and if so, in what form?”. Efficiency analysis is interesting and especially important, because lack of efficiency would provide the investor with an opportunity to earn an excess return. In the year 2009, 2.251 bonds were listed at the Danish bond market, which makes up for a circulating amount of 3.682 bn. Many of the bonds listed do have a poor level of liquidity, which is bad for the efficiency. On the other hand, the problem is not that big again, due to fact that less than 20 % of the bonds account for 94 % of the circulating amount. Both the turnover and the number of trades have dropped considerably in the period analyzed from 2004 – 2009. All in all we conclude that the overall level of liquidity is at a reasonable level, and thereby contributes to an efficient market. The concept “law of one price” relates to the fact that “In an efficient market all identical goods must have the same price”. By analyzing the relative pricing of three bonds, it is possible to tell whether the prices are in equilibrium. The results show that by creating a portfolio such that the payoff is identical with the one for a single bond, it is possible to make a excess return of 0,26 DKK. The result must take into account that all investors are exposed to transaction costs. Both the bond-swap and the arbitrage strategy show that the prices are not in equilibrium after transaction costs are paid. The three bonds do not fulfill the “law of one price”. If investors are able to earn an excess return by implementing an investment strategy called “riding the yield curve”, then the market doesn’t satisfy the definition of weak form efficiency. The results show that no excess return can be made by buying a bond with a high coupon rate, and selling this after a period h, instead of just buying a bond with a lower rate which expires at this time h. The analysis of this project about the efficiency in the Danish bond market does not give an unequivocal answer. The outcome depends on which analysis it is conducted at. The concept behind efficient markets is one of the cornerstones in financial theory, but as this project shows, it does not provide complete support in the Danish bond market.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2010
Number of pages116