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 and U.S. future market) with markets lacking an exchange (like the U.S. government bond market). 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.

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JEL: D4, G1, G12, G14

Keywords: Exchange, OTC market, government bonds, liquidity, crisis