On the Term Structure of Liquidity in the European Sovereign Bond Market

57 Pages Posted: 10 Aug 2018 Last revised: 12 Nov 2020

See all articles by Conall O'Sullivan

Conall O'Sullivan

University College Dublin (UCD) - Michael Smurfit Graduate School of Business

Vassilios G. Papavassiliou

University College Dublin (UCD) - Michael Smurfit Graduate School of Business; UCD Geary Institute for Public Policy; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Date Written: March 18, 2019

Abstract

The paper provides a high-frequency analysis of liquidity dynamics in the eurozone sovereign bond market over tranquil and crisis periods. We study time series of liquidity across the yield curve using high-frequency data from MTS, one of Europe’s leading electronic fixed-income trading platforms. We document flight-to-liquidity effects as investors prefer to trade on shorter-term benchmarks during liquidity dry-ups. We provide evidence of significant commonalities in spread and depth liquidity proxies which are weaker during the crisis period for both core and periphery economies although periphery countries display higher commonality than core countries during the crisis. We show that illiquidity of the periphery countries plays an important role in market dynamics and Granger causes illiquidity, volatility, returns, and CDS spreads across the maturity spectrum in both calm and crisis periods. Liquidity is priced both as a characteristic and as a risk factor even when controlling for credit risk, pointing to liquidity’s systematic dimension and importance.

Keywords: microstructure, liquidity, eurozone debt crisis, sovereign bond markets, common factors, liquidity premium

JEL Classification: C5, G01, G10, G15

Suggested Citation

O'Sullivan, Conall and Papavassiliou, Vassilios G., On the Term Structure of Liquidity in the European Sovereign Bond Market (March 18, 2019). Journal of Banking and Finance, Vol. 114, 2020, Available at SSRN: https://ssrn.com/abstract=3220540 or http://dx.doi.org/10.2139/ssrn.3220540

Conall O'Sullivan

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland
+353 1 716 8836 (Phone)
+353 1 283 5482 (Fax)

Vassilios G. Papavassiliou (Contact Author)

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

UCD Geary Institute for Public Policy ( email )

University College Dublin
Belfield, Dublin Dublin 4
Ireland

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

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