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European bond markets: Do illiquidity and concentration aggravate price shocks?

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  • Boermans, Martijn Adriaan
  • Frost, Jon
  • Steins Bisschop, Sophie

Abstract

We study the effects of market liquidity and ownership concentration of European bonds on price volatility during periods of market stress. Specifically, using security-by-security data from euro area investors we examine if market illiquidity and concentrated holdings explain the large price shocks witnessed during the 2013 Taper Tantrum and 2015 Bund Tantrum. Results suggest that market illiquidity, as measured by bid–ask spreads and a new Bloomberg liquidity measure, is a strong and statistically significant driver of price volatility in European bonds during both periods. Concentrated bond holdings have a significant upward effect on volatility only during the Bund Tantrum.

Suggested Citation

  • Boermans, Martijn Adriaan & Frost, Jon & Steins Bisschop, Sophie, 2016. "European bond markets: Do illiquidity and concentration aggravate price shocks?," Economics Letters, Elsevier, vol. 141(C), pages 143-146.
    • Handle: RePEc:eee:ecolet:v:141:y:2016:i:c:p:143-146
    DOI: 10.1016/j.econlet.2016.02.023
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    Cited by:

    1. Cezar, Rafael & Silvestrini, Maéva, 2021. "Impact of the ECB Quantitative Easing on the International Investment Position," International Economics, Elsevier, vol. 165(C), pages 241-263.
    2. Kirik, Alper & Ulusoy, Veysel, 2022. "Winds of tapering, financial gravity and COVID-19," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    3. Clemens Bonner & Eward Brouwer & Iman van Lelyveld, 2018. "Drivers of market liquidity - Regulation, monetary policy or new players?," DNB Working Papers 605, Netherlands Central Bank, Research Department.
    4. Xuan Vinh Vo, 2023. "Large Shareholders And Information Asymmetry In A Transition Economy €“ Evidence From Vietnam," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 68(05), pages 1551-1567, September.
    5. Martijn A. Boermans & Robert Vermeulen, 2020. "International investment positions revisited: Investor heterogeneity and individual security characteristics," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 466-496, May.
    6. Martijn Boermans & Viacheslav Keshkov, 2018. "The impact of the ECB asset purchases on the European bond market structure: Granular evidence on ownership concentration," DNB Working Papers 590, Netherlands Central Bank, Research Department.
    7. Akyildirim, Erdinc & Nguyen, Duc Khuong & Sensoy, Ahmet, 2018. "A tale of two risks in the EMU sovereign debt markets," Economics Letters, Elsevier, vol. 172(C), pages 102-106.
    8. Coates, Dermot & Osborne-Kinch, Jenny & Brian Power, 2017. "Securities Holdings Statistics in Ireland: Introducing the Enhanced Quarterly Statistics," Quarterly Bulletin Articles, Central Bank of Ireland, pages 70-86, January.
    9. W. Arrata & B. Nguyen, 2017. "Price impact of bond supply shocks: Evidence from the Eurosystem's asset purchase program," Working papers 623, Banque de France.
    10. Martijn Adriaan Boermans & Robert Vermeulen, 2016. "Market concentration in the euro area bond markets - An application with granular sectoral securities holdings statistics / Investor heterogeneity and international portfolio holdings: Estimating a gr," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41, Bank for International Settlements.
    11. Rafael Cezar & Maéva Silvestrini, 2018. "Impact of the ECB Quantitative Easing on the French International Investment Position," Working papers 701, Banque de France.
    12. Martijn Boermans, 2022. "A literature review of securities holdings statistics research and a practitioner’s guide," Working Papers 757, DNB.

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    More about this item

    Keywords

    Market liquidity; Bond ownership; Financial crisis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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