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

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  • Upper, Christian

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 führten zu wesentlichen Beeinträchtigungen bei der Preisbildung und zu Liquiditätsengpässen auf mehreren Wertpapiermärkten. Im Rahmen umfangreicher Vermögensumschichtungen wurde ein wesentlicher Teil des Anlagevermögens entweder als Barreserve gehalten oder in solchen Wertpapieren investiert, die als besonders risikoarm und hochliquide angesehen wurden. Einer dieser ?sicheren Häfen? war der Markt für Bundeswertpapiere. Die vorliegende Arbeit analysiert die Liquidität des Marktes für vier zehnjährige Bundesanleihen während dieses Zeitraums. Sie basiert auf einem bisher nicht ausgewerteten Datensatz des Bundesamts für den Wertpapierhandel, der jede einzelne Transaktion dieser vier Anleihen in Deutschland umfasst. Dies ist besonders für Arbeiten über den Rentenmarkt von großem Interesse, auf dem außerbörsliche Transaktionen einen Großteil des Handelsvolumens ausmachen. Die Renditevolatilität der vier Anleihen stieg nach der russischen Abwertung am 17. August 1998 zunächst auf mehr als das Doppelte an und erreichte Anfang Oktober weitere Höchstwerte. Gleichzeitig weitete sich der Renditeabstand zwischen den einzelnen Papieren von weniger als fünf Basispunkten im ersten Halbjahr auf mehr als zwanzig Basispunke aus. Die Handelskosten ? gemessen an der effektiven Geld-Brief-Spanne ? stiegen auch in einem ?sicheren Hafen? wie der Markt für Bundesanleihen an, was auf eine Reduzierung der Marktliquidität hindeutet. Trotzdem war der Markt in der Lage, ein statistisch signifikant höhere Anzahl von Transaktionen und Volumina zu handeln. In diesem Sinne war die Bereitstellung von Marktliquidität während der Turbulenzen außergewöhnlich effektiv. Das Verhältnis zwischen der effektiven Geld-Brief-Spanne und dem unerwarteten Handelsvolumen ist positiv und statistisch signifikant, was auf die Existenz von nichtöffentlichen Informationen hindeutet. Den Anstieg der Geld-Briefspannnen während der Turbulenzen kann allerdings nicht durch überraschend hohe Umsätze erklärt werden.

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2000,01.

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Date of creation: 2000
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Handle: RePEc:zbw:bubdp1:4137

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Cited by:
  1. 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.
  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.J. McDermott, 2012. "Safe Haven Assets and Investor Behavior Under Uncertainty," Working Paper Series 173, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  4. Dirk G. Baur & Thomas K. McDermott, . "Is gold a safe haven? International evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp310, IIIS.
  5. 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.
  6. 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.
  7. Claudio E. V. Borio, 2004. "Market distress and vanishing liquidity: anatomy and policy options," BIS Working Papers 158, Bank for International Settlements.

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