Funding Constraints and Market Illiquidity in the European Treasury Bond Market

HKIMR Working Paper No.21/2018

61 Pages Posted: 10 Oct 2018

See all articles by Sophie Moinas

Sophie Moinas

Toulouse School of Economics

Minh Nguyen

Newcastle University Business School

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 17, 2018

Abstract

Theoretical studies show that shocks to funding constraints should affect and be af-fected by market illiquidity. However, little is known about the empirical magnitude of such responses because of the intrinsic endogeneity of illiquidity shocks. This paper adopts an identification technique based on the heteroskedasticity of illiquidity proxies to infer the reaction of one measure to shocks affecting the other in a joint setting. Using data for the European Treasury bond market, we find evidence of a two-way response occurring between funding and market illiquidity shocks. In the cross-section, we show that individual bonds’ illiquidity responses to funding or market illiquidity shocks vary with with bond maturity, the credit risk of the issuer, haircuts, and the number of bonds issued by the country.

Keywords: Illiquidity, Asset Pricing, Identification, Heteroskedasticity

JEL Classification: G10, G28

Suggested Citation

Moinas, Sophie and Nguyen, Minh and Valente, Giorgio, Funding Constraints and Market Illiquidity in the European Treasury Bond Market (September 17, 2018). HKIMR Working Paper No.21/2018. Available at SSRN: https://ssrn.com/abstract=3250612 or http://dx.doi.org/10.2139/ssrn.3250612

Sophie Moinas (Contact Author)

Toulouse School of Economics ( email )

Toulouse 1 Capitole University
Place Anatole-France
Toulouse Cedex, F-31042
France

Minh Nguyen

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

One Pacific Place, 10th Floor
88 Queensway
Hong Kong
China

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