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

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

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

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

Department of Finance

Research output: Contribution to conference › Paper › Research › peer-review

Abstract

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 language	English
Publication date	2014
Number of pages	62
Publication status	Published - 2014
Event	The 74th Annual Meeting of American Finance Association. AFA 2014 - Loews Philadelphia Hotel, Philadelphia, United States Duration: 3 Jan 2014 → 5 Jan 2014 Conference number: 74 http://www.afajof.org/details/page/5310071/2014-Meeting-Program.html

Conference

Conference	The 74th Annual Meeting of American Finance Association. AFA 2014
Number	74
Location	Loews Philadelphia Hotel
Country/Territory	United States
City	Philadelphia
Period	03/01/2014 → 05/01/2014
Internet address	http://www.afajof.org/details/page/5310071/2014-Meeting-Program.html

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https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=AFA2014&paper_id=576

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Cite this

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title = "The Microstructure of the European Sovereign Bond Market: A Study of the Euro-zone Crisis",

abstract = "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 andmarket 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, theLong-Term Renancing Operations (LTRO) by the European Central Bank (ECB) on December 8, 2012, clearly attenuated the relationship between credit risk and liquidity.",

keywords = "Liquidity, Government bonds, Financial crisis, MTS bond market",

author = "Loriana Pelizzon and Subrahmanyam, {Marti G.} and Davide Tomio and Jun Uno",

year = "2014",

language = "English",

note = "null ; Conference date: 03-01-2014 Through 05-01-2014",

url = "http://www.afajof.org/details/page/5310071/2014-Meeting-Program.html",

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Pelizzon, L, Subrahmanyam, MG, Tomio, D & Uno, J 2014, 'The Microstructure of the European Sovereign Bond Market: A Study of the Euro-zone Crisis', Paper presented at The 74th Annual Meeting of American Finance Association. AFA 2014, Philadelphia, United States, 03/01/2014 - 05/01/2014. <https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=AFA2014&paper_id=576>

TY - CONF

T1 - The Microstructure of the European Sovereign Bond Market

AU - Pelizzon, Loriana

AU - Subrahmanyam, Marti G.

AU - Tomio, Davide

AU - Uno, Jun

N1 - Conference code: 74

PY - 2014

Y1 - 2014

N2 - 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 andmarket 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, theLong-Term Renancing Operations (LTRO) by the European Central Bank (ECB) on December 8, 2012, clearly attenuated the relationship between credit risk and liquidity.

AB - 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 andmarket 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, theLong-Term Renancing Operations (LTRO) by the European Central Bank (ECB) on December 8, 2012, clearly attenuated the relationship between credit risk and liquidity.

KW - Liquidity

KW - Government bonds

KW - Financial crisis

KW - MTS bond market

M3 - Paper

Y2 - 3 January 2014 through 5 January 2014

ER -