The Sovereign Debt Crisis: Flights or Freezes?

59 Pages Posted: 30 Oct 2017 Last revised: 15 Sep 2022

See all articles by Per Östberg

Per Östberg

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

Thomas Richter

ZHAW School of Management and Law

Date Written: May 1, 2018

Abstract

Multiple asset pricing theories predict that large price changes should be associated with abnormal trading volume, inducing investor rebalancing and possibly leading to flights. In contrast, consistent with market microstructure theories, this paper documents freezes, a reduction in trading volume (approximately 30% relative to the previous trading week) during market stress episodes in the European sovereign bond market. We trace the market freezes to increasing transaction costs driven by reduced risk bearing capacity of market makers.

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: Flights 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

ZHAW School of Management and Law ( email )

St.-Georgen-Platz 2
Winterthur, 8401
Switzerland

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