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A Composite Indicator of Sovereign Bond Market Liquidity in the Euro Area

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  • Riccardo Poli
  • Marco Taboga

Abstract

We propose a methodology to build and validate a composite indicator of the market liquidity of euro‐area sovereign bonds, with the aim of providing a comprehensive assessment of liquidity conditions in several different trading venues and countries. The composite indicator, which starts in 2010, allows us to put into historical context the liquidity deterioration observed during the Covid‐19 crisis, which was almost as severe as that experienced during the European sovereign debt crisis. While the latter impairment in liquidity conditions lasted for more than 2 years, the most recent one was quickly reabsorbed. We provide evidence that the promptness and boldness of the European Central Bank's interventions in 2020 could contribute to explain this difference: according to our indicator, the announcements of some monetary policy measures having an explicit market stabilization function were followed by significant improvements in the liquidity of sovereign bonds.

Suggested Citation

  • Riccardo Poli & Marco Taboga, 2025. "A Composite Indicator of Sovereign Bond Market Liquidity in the Euro Area," International Finance, Wiley Blackwell, vol. 28(1), pages 23-36, April.
    • Handle: RePEc:bla:intfin:v:28:y:2025:i:1:p:23-36
    DOI: 10.1111/infi.12458
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    2. Scheicher, Martin, 2023. "Intermediation in US and EU bond and swap markets: stylised facts, trends and impact of the coronavirus (COVID-19) crisis in March 2020," ESRB Occasional Paper Series 24, European Systemic Risk Board.
    3. Maria Ludovica Drudi & Giulio Carlo Venturi, 2023. "Assessing the liquidity premium in the Italian bond market," Questioni di Economia e Finanza (Occasional Papers) 795, Bank of Italy, Economic Research and International Relations Area.
    4. Papavassiliou, Vassilios G. & Xia, Fan Dora, 2025. "Liquidity in the euro area sovereign bond market during the “dash for cash” driven by the COVID-19 crisis," Economics Letters, Elsevier, vol. 247(C).
    5. Coppola, Anna & Urga, Giovanni & Varaldo, Alessandro, 2025. "Asset class liquidity risk indicators. Timing the risk in the European and US equity and bond markets," Journal of Financial Stability, Elsevier, vol. 76(C).
    6. Arthur Rossi & Ernest Lecomte & Théophile Legrand & Benoît Nguyen, 2023. "French sovereign debt liquidity: main factors, recent developments and resilience during the Covid crisis [Déterminants, évolutions de la liquidité de la dette souveraine française et résilience au," Bulletin de la Banque de France, Banque de France, issue 246.
    7. Berardi, Andrea, 2023. "Term premia and short rate expectations in the euro area," Journal of Empirical Finance, Elsevier, vol. 74(C).

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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