How Has Sovereign Bond Market Liquidity Changed? - An Illiquidity Spillover Analysis

SAFE Working Paper No. 151

44 Pages Posted: 19 Oct 2016

See all articles by Michael Schneider

Michael Schneider

Deutsche Bundesbank; Goethe University Frankfurt

Fabrizio Lillo

Università di Bologna

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

Date Written: September 28, 2016

Abstract

Amid increasing regulation, structural changes of the market and Quantitative Easing as well as extremely low yields, concerns about the market liquidity of the Eurozone sovereign debt markets have been raised. We aim to quantify illiquidity risks, especially such related to liquidity dry-ups, and illiquidity spillover across maturities by examining the reaction to illiquidity shocks at high frequencies in two ways:

a) the regular response to shocks using a variance decomposition and,

b) the response to shocks in the extremes by detecting illiquidity shocks and modeling those as ultivariate Hawkes processes.

We find that:

a) market liquidity is more fragile and less predictable when an asset is very illiquid and,

b) the response to shocks in the extremes is structurally different from the regular response.

In 2015 long-term bonds are less liquid and the medium-term bonds are liquid, although we observe that in the extremes the medium-term bonds are increasingly driven by illiquidity spillover from the long-term titles.

Keywords: liquidity, jump detection, Hawkes processes, government bonds, MTS bond market, Quantitative Easing

Suggested Citation

Schneider, Michael and Lillo, Fabrizio and Pelizzon, Loriana, How Has Sovereign Bond Market Liquidity Changed? - An Illiquidity Spillover Analysis (September 28, 2016). SAFE Working Paper No. 151, Available at SSRN: https://ssrn.com/abstract=2853459 or http://dx.doi.org/10.2139/ssrn.2853459

Michael Schneider

Deutsche Bundesbank ( email )

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

Goethe University Frankfurt

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Fabrizio Lillo

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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