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The Sovereign Debt Crisis: Rebalancing or Freezes?

Author

Listed:
  • Per Östberg

    (University of Zurich and Swiss Finance Institute)

  • Thomas Richter

    (University of Zurich and Swiss Finance Institute)

Abstract

Using high-frequency data we document that episodes of market turmoil in the European sovereign bond market are on average associated with large decreases in trading volume. The response of trading volume to market stress is conditional on transaction costs. Low transaction cost turmoil episodes are associated with volume increases (investors rebalance), while high transaction cost turmoil periods are associated with abnormally low volume (market freezes). We find suggestive evidence of market freezes in response to shocks to the risk bearing capacity of market makers while investor rebalancing is triggered by wealth shocks. Overall, our results show that the recent sovereign debt crisis was not associated with large-scale investor rebalancing.

Suggested Citation

  • Per Östberg & Thomas Richter, 2017. "The Sovereign Debt Crisis: Rebalancing or Freezes?," Swiss Finance Institute Research Paper Series 17-32, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1732
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    Cited by:

    1. Thomas Richter, 2021. "Central Counterparties and Liquidity Provision in Cash Markets," JRFM, MDPI, vol. 14(12), pages 1-26, December.
    2. Richter, Thomas Julian, 2022. "Liquidity commonality in sovereign bond markets," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 501-518.

    More about this item

    Keywords

    Sovereign Debt Crisis; Trading Volume; Liquidity; Flights; Rebalancing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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