The Microstructure of the European Sovereign Bond Market: A Study of the Euro-zone Crisis

Loriana Pelizzon, Marti G. Subrahmanyam, Davide Tomio, Jun Uno

Research output: Contribution to conferencePaperResearchpeer-review


We explore the interaction between credit risk and liquidity, during the Euro-zone crisis, in the Italian sovereign bond market, using a unique tick-by-tick dataset, from the period June 2011-December 2012. We document a strong, dynamic relationship between changes in sovereign credit risk and
market liquidity, conditional on the credit default swap (CDS) spread: When the CDS is above 500 basis points (bp), market liquidity adjusts more rapidly and signicantly to changes in the credit risk. Other global systemic factors also aect market liquidity, while, surprisingly, the specic credit risk of primary dealers plays only a modest role, especially under conditions of stress. Further, the
Long-Term Renancing Operations (LTRO) by the European Central Bank (ECB) on December 8, 2012, clearly attenuated the relationship between credit risk and liquidity.
Original languageEnglish
Publication date2014
Number of pages62
Publication statusPublished - 2014
EventThe 74th Annual Meeting of American Finance Association. AFA 2014 - Loews Philadelphia Hotel, Philadelphia, United States
Duration: 3 Jan 20145 Jan 2014
Conference number: 74


ConferenceThe 74th Annual Meeting of American Finance Association. AFA 2014
LocationLoews Philadelphia Hotel
Country/TerritoryUnited States
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