Flight-to-Liquidity Flows in the Euro Area Sovereign Debt Crisis

35 Pages Posted: 15 Dec 2014

See all articles by Juan A. Garcia

Juan A. Garcia

European Central Bank (ECB)

Ricardo Gimeno

Banco de España

Date Written: December 15, 2014

Abstract

In periods of market stress, portfolio reallocations in bond markets reflect both safety and liquidity concerns. Using sovereign and national agency bonds, we construct indicators of liquidity premia in major euro area bond markets; we document the weakening of the correlation between core and periphery market liquidity during the euro area sovereign bond crisis; and we identify several episodes of significant flight-to-liquidity (FTL) flows above and beyond flight-to-safety (FTS) spells in the period 2009-13. We show that FTL flows led to significant inverse moves in sovereign bond yields in euro area core and periphery markets. Moreover, FTL flows triggered declines in core and periphery stock markets and are associated with lower macroeconomic confidence in the euro area as a whole, which underscores the importance of FTL episodes for investors and policymakers alike.

Keywords: liquidity premia, flight to liquidity, flight to safety, sovereign debt crisis

JEL Classification: G01, G12, H63

Suggested Citation

Garcia, Juan Angel and Gimeno, Ricardo, Flight-to-Liquidity Flows in the Euro Area Sovereign Debt Crisis (December 15, 2014). Banco de Espana Working Paper No. 1429, Available at SSRN: https://ssrn.com/abstract=2538371 or http://dx.doi.org/10.2139/ssrn.2538371

Juan Angel Garcia (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ricardo Gimeno

Banco de España ( email )

Madrid 28014
Spain

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