Advanced Search
MyIDEAS: Login to save this book chapter or follow this series

How safe was the "Safe Haven"? Financial market liquidity during the 1998 turbulences

In: Market liquidity: proceedings of a workshop held at the BIS

Contents:

Author Info

  • Christian Upper

    (Deutsche Bundesbank)

Abstract

The turbulences in the international financial markets during the summer and autumn of 1998 put the price formation and liquidity provision mechanism in many markets under severe strain. As part of the large-scale portfolio rebalancing that took place, investors shifted a large part of their holdings into cash and into instruments that were perceived as having a low risk and being highly liquid. One of these "safe havens" was the market for German government securities. The paper examines the liquidity of the secondary market for four German benchmark government bonds during this period. The analysis is based on a unique dataset provided by the German securities? regulator, which covers every single transaction of the four bonds in Germany. This feature is particularly attractive for the bond market, where OTC transactions account for most trading. The volatility of yields of the four bonds more than doubled in the wake of the Russian devaluation on August 17th, 1998, and experienced a further peak in early October. It was accompanied by a widening in the yield spread between the individual bonds, which soared to more than twenty basis points from less than five basis points during the first half of the year. The cost of trading, as measured by the effective spread, increased even in a "safe haven" like the market for ten year German government bonds, indicating a reduction in liquidity. Nevertheless, the market was able to handle a statistically significantly higher than usual number of transactions and turnover. In this sense, liquidity provision has been remarkably effective in dealing with the turbulences. Effective bid-ask spreads are positively related to unexpected trading volume, which should reflect the amount of private information in the market. Nevertheless, surprises volume cannot explain the surge in spreads that occurred during the turbulences. -- Die Turbulenzen auf den internationalen Finanzmärkten im Sommer und Herbst 1998 füh

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bis.org/publ/bppdf/bispap02m.pdf
Download Restriction: no

Bibliographic Info

as in new window

This chapter was published in:

  • Bank for International Settlements, 2001. "Market liquidity: proceedings of a workshop held at the BIS," BIS Papers, Bank for International Settlements, number 02, 8.
    This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 02-13.

    Handle: RePEc:bis:bisbpc:02-13

    Contact details of provider:
    Postal: Centralbahnplatz 2, CH - 4002 Basel
    Phone: (41) 61 - 280 80 80
    Fax: (41) 61 - 280 91 00
    Email:
    Web page: http://www.bis.org/
    More information through EDIRC

    Related research

    Keywords:

    Other versions of this item:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Dirk G. Baur & Thomas K.J. McDermott, 2011. "Safe Haven Assets and Investor Behaviour Under Uncertainty," The Institute for International Integration Studies Discussion Paper Series iiisdp392, IIIS, revised Feb 2012.
    2. Christian Upper & Thomas Werner, 2002. "How resilient are financial markets to stress? Bund futures and bonds during the 1998 turbulence," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 110-123 Bank for International Settlements.
    3. Dirk G. Baur & Thomas K. McDermott, . "Is gold a safe haven? International evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp310, IIIS.
    4. Claudio E. V. Borio, 2004. "Market distress and vanishing liquidity: anatomy and policy options," BIS Working Papers 158, Bank for International Settlements.
    5. Marvin Barth & Eli Remolona & Philip Wooldridge, 2002. "Changes in market functioning and central bank policy: an overview of the issues," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 1-24 Bank for International Settlements.
    6. Obermaier, Robert, 2005. "Unternehmensbewertung, Basiszinssatz und Zinsstruktur: Kapitalmarktorientierte Bestimmung des risikolosen Basiszinssatzes bei nicht-flacher Zinsstruktur," University of Regensburg Working Papers in Business, Economics and Management Information Systems 408, University of Regensburg, Department of Economics.
    7. Mark, Joy, 2011. "Gold and the US dollar: Hedge or haven?," Finance Research Letters, Elsevier, vol. 8(3), pages 120-131, September.
    8. Marvin J. Barth & Philip D. Wooldridge & Eli M Remolona, 2002. "Changes in market functioning and central bank policy: an overview of the issues," BIS Working Papers 120, Bank for International Settlements.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:bis:bisbpc:02-13. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.