Abstract
The purpose of this paper is to determine the liquidity spillover effects of trades executed in European sovereign bond markets and to assess the driving factors behind the magnitude of the spill-overs between different markets. The one minute-frequency limit order-book dataset is constructed from mid-2011 until end-2017 for sovereign bonds from the six largest euro area countries. It is used for the event study and panel regression model. The event study results revealed that liquidity spill-over effects of trades exist and vary highly across different order types, direction and size of the trade, the maturity of traded bonds, and various markets. The panel regression model showed that less liquid bonds and bonds whose issuer is closer by distance to the country of the traded bond have more substantial spillover effects and, at the same time, are also more affected by trades executed in another market. These results should be of interest to bond market participants who want to limit the exposure to the liquidity spillover risk in bond markets.
Highlights
While fixed income market traders and analysts do not pay much attention to the liquidity situation when markets are sufficiently liquid, it becomes a critical issue when market liquidity suddenly evaporates
The purpose of this paper is to determine the liquidity spillover effects of trades executed in European sovereign bond markets and to assess the driving factors behind the magnitude of the spill-overs between different markets
These results should be of interest to bond market participants who want to limit the exposure to the liquidity spillover risk in bond markets
Summary
While fixed income market traders and analysts do not pay much attention to the liquidity situation when markets are sufficiently liquid, it becomes a critical issue when market liquidity suddenly evaporates. These tail risk events of liquidity shocks are mainly characterized by the sharp reduction in the number of traders who stand ready to buy and sell particular bonds and become a real concern to fixed income investors who base their decisions on the available bid and ask prices in the market. I.e., the ease and speed of trading, is crucial to the functioning of financial markets, there has been a surge of interest in the topic of market (il)liquidity in recent years This has been mostly the case after the European sovereign debt crisis when market participants witnessed deprived liquidity conditions (European System of Financial Supervision 2016). What causes these sudden liquidity shocks in fixed income markets? Do these events affect only some particular bonds or the whole market? Is there a contagion effect that reverberates among different bonds? This study tries (at least to some extent) to shed light on this topic by analyzing the impact of sovereign bond trade shocks and how they spillover to other bonds and markets
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call