The Sovereign Debt Crisis: Rebalancing or Freezes?

55 Pages Posted: 30 Oct 2017 Last revised: 14 May 2018

See all articles by Per Östberg

Per Östberg

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Thomas Richter

Swiss Finance Institute; University of Zurich - Department of Banking and Finance

Date Written: May 1, 2018

Abstract

Using high-frequency data we document that episodes of market turmoil in the European sovereign bond market are on average associated with large decreases in trading volume. The response of trading volume to market stress is conditional on transaction costs. Low transaction cost turmoil episodes are associated with volume increases (investors rebalance), while high transaction cost turmoil periods are associated with abnormally low volume (market freezes). We find suggestive evidence of market freezes in response to shocks to the risk bearing capacity of market makers while investor rebalancing is triggered by wealth shocks. Overall, our results show that the recent sovereign debt crisis was not associated with large-scale investor rebalancing.

Keywords: Sovereign Debt Crisis, Trading Volume, Liquidity, Flights, Rebalancing

JEL Classification: G12, G14, G21, E44

Suggested Citation

Östberg, Per and Richter, Thomas, The Sovereign Debt Crisis: Rebalancing or Freezes? (May 1, 2018). Swiss Finance Institute Research Paper No. 17-32, Available at SSRN: https://ssrn.com/abstract=3060504 or http://dx.doi.org/10.2139/ssrn.3060504

Per Östberg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland
+41 44 6342956 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Thomas Richter

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

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