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How Has Sovereign Bond Market Liquidity Changed? - An Illiquidity Spillover Analysis

SAFE Working Paper No. 151

44 Pages Posted: 19 Oct 2016  

Michael Schneider

Scuola Normale Superiore; Deutsche Bundesbank

Fabrizio Lillo

Scuola Normale Superiore

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Date Written: September 28, 2016

Abstract

Amid increasing regulation, structural changes of the market and Quantitative Easing as well as extremely low yields, concerns about the market liquidity of the Eurozone sovereign debt markets have been raised. We aim to quantify illiquidity risks, especially such related to liquidity dry-ups, and illiquidity spillover across maturities by examining the reaction to illiquidity shocks at high frequencies in two ways:

a) the regular response to shocks using a variance decomposition and,

b) the response to shocks in the extremes by detecting illiquidity shocks and modeling those as ultivariate Hawkes processes.

We find that:

a) market liquidity is more fragile and less predictable when an asset is very illiquid and,

b) the response to shocks in the extremes is structurally different from the regular response.

In 2015 long-term bonds are less liquid and the medium-term bonds are liquid, although we observe that in the extremes the medium-term bonds are increasingly driven by illiquidity spillover from the long-term titles.

Keywords: liquidity, jump detection, Hawkes processes, government bonds, MTS bond market, Quantitative Easing

Suggested Citation

Schneider, Michael and Lillo, Fabrizio and Pelizzon, Loriana, How Has Sovereign Bond Market Liquidity Changed? - An Illiquidity Spillover Analysis (September 28, 2016). SAFE Working Paper No. 151. Available at SSRN: https://ssrn.com/abstract=2853459 or http://dx.doi.org/10.2139/ssrn.2853459

Michael Schneider

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Fabrizio Lillo

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

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

Goethe University Frankfurt - Research Center SAFE ( email )

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

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

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

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