Watering the Garden of Government Securities: Measuring the 'Bunching' Effect in Euro Sovereign Bond Markets

Government of the Italian Republic (Italy) - Ministry of Economy and Finance - Department of the Treasury Working Papers Collection

22 Pages Posted: 12 Jun 2009

See all articles by Andrea Coppola

Andrea Coppola

World Bank; University of Rome Tor Vergata - Department of Economics and Law; Ministry of Economy and Finance, Italy

Gustavo Piga

University of Rome

Date Written: June 5, 2008

Abstract

The adoption of a common currency raised the degree of substitution between financial instruments supplied by EU Member States to finance their national debts. In this framework, our paper looks at a particular determinant of liquidity-related spreads in euro-area government bonds. Simultaneous issuance of similar bonds floods the market with paper and could lead to higher funding costs for sovereign borrowers. We test the significance of this problem, over-supplying liquidity due to a bunching of contemporaneous issues, in a government bond market where borrowers do not coordinate their issuance plans. We find that there is a significant relationship between bunching in issues and higher yield spreads. Moreover, in line with the existing literature, we find a negative correlation between liquidity and bond yields.

Keywords: EMU, Government Bond Yields, Liquidity, Calendar of Issuance

JEL Classification: H63, H69

Suggested Citation

Coppola, Andrea and Piga, Gustavo, Watering the Garden of Government Securities: Measuring the 'Bunching' Effect in Euro Sovereign Bond Markets (June 5, 2008). Government of the Italian Republic (Italy) - Ministry of Economy and Finance - Department of the Treasury Working Papers Collection. Available at SSRN: https://ssrn.com/abstract=1417372 or http://dx.doi.org/10.2139/ssrn.1417372

Andrea Coppola (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

University of Rome Tor Vergata - Department of Economics and Law ( email )

Rome, I-00133

Ministry of Economy and Finance, Italy ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

Gustavo Piga

University of Rome ( email )

Via di Tor Vergata
Rome, Lazio
Italy

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