Outages in Sovereign Bond Markets

101 Pages Posted: 11 Jun 2024

Multiple version iconThere are 2 versions of this paper

Date Written: June, 2024

Abstract

We use outages as natural experiments to study sovereign bond market functioning. When the euro area futures market goes down, trading activity on the cash market declines, liquidity evaporates, and transaction prices deviate from fundamental values. Tracing back this macrolevel market breakdown to the micro-level, we show that particularly dealers withdraw from the cash market during outages. While most of their remaining trades remain fairly priced, dealer’s capacity to intermediate trades on the cash market is reduced, forcing more clients to trade directly with each other, leading to substantial mispricing. Lastly, outages on cash trading venues barely affect the futures market, suggesting that price formation and liquidity provision is a one-way street, and outages on the US and euro area futures market barely affect each other, in stark contrast to the significant price spillovers. Our results reveal the trade-offs between a (de)centralized market structure, they support cross-asset learning models to explain the link between liquidity and arbitrage, and they demonstrate how financial intermediaries can impose important limits to arbitrage.

Keywords: market microstructure, natural experiment, yield curve

JEL Classification: G12, G14, G23

Suggested Citation

Kerssenfischer, Mark and Helmus, Caspar, Outages in Sovereign Bond Markets (June, 2024). ECB Working Paper No. 2024/2944, Available at SSRN: https://ssrn.com/abstract=4860755 or http://dx.doi.org/10.2139/ssrn.4860755

Mark Kerssenfischer (Contact Author)

Deutsche Bundesbank ( email )

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

Caspar Helmus

Deutsche Bundesbank ( email )

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

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