Arbeitspapier

How has sovereign bond market liquidity changed? An illiquidity spillover analysis

Amid increasing regulation, structural changes of the market and Quantitative Easing as well as extremely low yields, concerns about the market liquidity of the Eurozone sovereign debt markets have been raised. We aim to quantify illiquidity risks, especially such related to liquidity dry-ups, and illiquidity spillover across maturities by examining the reaction to illiquidity shocks at high frequencies in two ways: a) the regular response to shocks using a variance decomposition and, b) the response to shocks in the extremes by detecting illiquidity shocks and modeling those as ultivariate Hawkes processes. We find that: a) market liquidity is more fragile and less predictable when an asset is very illiquid and, b) the response to shocks in the extremes is structurally different from the regular response. In 2015 long-term bonds are less liquid and the medium-term bonds are liquid, although we observe that in the extremes the medium-term bonds are increasingly driven by illiquidity spillover from the long-term titles.

Language
Englisch

Bibliographic citation
Series: SAFE Working Paper ; No. 151

Classification
Wirtschaft
Subject
liquidity
jump detection
Hawkes processes
government bonds
MTS bond market
Quantitative Easing

Event
Geistige Schöpfung
(who)
Schneider, Michael
Lillo, Fabrizio
Pelizzon, Loriana
Event
Veröffentlichung
(who)
Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
(where)
Frankfurt a. M.
(when)
2016

DOI
doi:10.2139/ssrn.2853459
Handle
URN
urn:nbn:de:hebis:30:3-417031
Last update
10.03.2025, 11:45 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Schneider, Michael
  • Lillo, Fabrizio
  • Pelizzon, Loriana
  • Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe

Time of origin

  • 2016

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