Institutional Presence in Secondary Bank Bond Markets: How Does It Affect Liquidity and Volatility?

59 Pages Posted: 7 May 2019

See all articles by Silviu Oprica

Silviu Oprica

European Central Bank (ECB)

Christian Weistroffer

European Central Bank (ECB)

Date Written: May 3, 2019

Abstract

Using newly available information on euro area sectoral holdings of securities, this paper investigates to what extent the presence of institutional investors affects volatility and liquidity in secondary bank bond markets. We find that non-bank financial intermediaries, in particular money market funds (MMFs), have a positive impact on secondary bank bond markets’ liquidity conditions, at the cost of significantly increasing volatility of daily returns. The effect translates to more than a 19% improvement in liquidity conditions and up to 57% increase in daily-return volatility, assuming MMFs hold about 10% of the notional amount in the secondary market of a representative euro area bank bond. The effect is relative to the impact the non-financial private sector has on markets. Investment funds, insurance corporations and pension funds are found to similarly affect market conditions, though to a lesser magnitude. We find a trade-off between volatility and liquidity, where the stronger presence of institutional investors at the same time improves liquidity and increases volatility. The results suggest that possible structural shifts in investor composition matter for market conditions and should be monitored by financial stability authorities.

Keywords: financial markets, institutional ownership, bond liquidity, securities holdings, generalized method of moments

JEL Classification: G10, G15, G23

Suggested Citation

Oprica, Silviu and Weistroffer, Christian, Institutional Presence in Secondary Bank Bond Markets: How Does It Affect Liquidity and Volatility? (May 3, 2019). ECB Working Paper No. 2276 (2019); ISBN 978-92-899-3538-8 . Available at SSRN: https://ssrn.com/abstract=3383469

Silviu Oprica (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christian Weistroffer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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