Illiquidity Spillovers: Theory and Evidence from European Telecom Bond Issuance

Abstract

In a study of the European telecommunication-sector bond market, we find empirical evidence that a firm's new bond issue can temporarily inflate yield spreads of other bonds in its sector. We show that this effect seems unrelated to new fundamental information about the bond's issuer. Our results imply that an issuance of 15.5 billion Euros by Deutsche Telekom temporarily depressed the mark-to-market value of 100 billion Euros in outstanding European telecom debt by approximately 273 million Euros. This study is supported and motivated by a stylized model of a risk-averse liquidity-provider in which supply shocks, such as new issues, place price pressure on correlated securities.

Keywords: Bond issuance, Illiquidity spillovers, European telecom bonds

JEL Classification: G12, G14