Sovereign Credit Risk, Liquidity, and ECB Intervention: Deus Ex Machina?

Journal of Financial Economics, volume 122, issue 1, 2016[10.1016/j.jfineco.2016.06.001]

66 Pages Posted: 1 Apr 2015 Last revised: 21 Feb 2025

See all articles by Loriana Pelizzon

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business; NYU Shanghai

Davide Tomio

Darden School of Business

Jun Uno

Waseda University

Date Written: March 1, 2015

Abstract

We examine the dynamic relation between credit risk and liquidity in the Italian sovereign bond market during the Euro-zone crisis and the subsequent European Central Bank (ECB) interventions. Credit risk drives the liquidity of the market: a 10% change in the credit default swap (CDS) spread leads to a 13% change in the bid-ask spread, the relation being stronger when the CDS spread exceeds 500 bp. The Long-Term Refinancing Operations (LTRO) of the ECB weakened the sensitivity of market makers’ liquidity provision to credit risk, highlighting the importance of funding liquidity measures as determinants of market liquidity.

Keywords: Liquidity, Credit Risk, Euro-zone Government Bonds, Financial Crisis, MTS Bond Market

JEL Classification: G01, G12, G14

Suggested Citation

Pelizzon, Loriana and Subrahmanyam, Marti G. and Tomio, Davide and Uno, Jun, Sovereign Credit Risk, Liquidity, and ECB Intervention: Deus Ex Machina? (March 1, 2015). Journal of Financial Economics, volume 122, issue 1, 2016[10.1016/j.jfineco.2016.06.001], Available at SSRN: https://ssrn.com/abstract=2587786 or http://dx.doi.org/10.1016/j.jfineco.2016.06.001

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

NYU Shanghai ( email )

1555 Century Ave
Shanghai, 200122
China

Davide Tomio

Darden School of Business ( email )

100 Darden Boulevard
Charlottesville, VA 22903
United States

Jun Uno

Waseda University ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku
Tokyo, 1698050
Japan

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