Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market
AbstractDo bond investors demand credit quality or liquidity? The answer is both, but at different times and for different reasons. Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a non-trivial role especially for low credit risk countries and during times of heightened market uncertainty. In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity. We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12376.
Date of creation: Jul 2006
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- Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
- G0 - Financial Economics - - General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-05 (All new papers)
- NEP-EEC-2006-08-05 (European Economics)
- NEP-FIN-2006-08-05 (Finance)
- NEP-FMK-2006-08-05 (Financial Markets)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Core versus pÃ©riphÃ©rie : pourquoi les taux souverains sont-ils nÃ©gativement corrÃ©lÃ©s ?
by email@example.com (Le Captain') in Captain Economics on 2012-11-23 06:00:02
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