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

In: Market liquidity: proceedings of a workshop held at the BIS


  • Christian Upper

    (Deutsche Bundesbank)


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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Christian Upper, 2001. "How safe was the "Safe Haven"? Financial market liquidity during the 1998 turbulences," BIS Papers chapters,in: Bank for International Settlements (ed.), Market liquidity: proceedings of a workshop held at the BIS, volume 2, pages 241-266 Bank for International Settlements.
  • Handle: RePEc:bis:bisbpc:02-13

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    Cited by:

    1. Baur, Dirk G. & McDermott, Thomas K., 2010. "Is gold a safe haven? International evidence," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1886-1898, August.
    2. Dirk G. Baur & Thomas K.J. McDermott, 2011. "Safe Haven Assets and Investor Behaviour Under Uncertainty," The Institute for International Integration Studies Discussion Paper Series iiisdp392, IIIS, revised Feb 2012.
    3. Claudio E. V. Borio, 2004. "Market distress and vanishing liquidity: anatomy and policy options," BIS Working Papers 158, Bank for International Settlements.
    4. repec:eco:journ1:2017-02-82 is not listed on IDEAS
    5. 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.
    6. repec:eee:eneeco:v:64:y:2017:i:c:p:494-510 is not listed on IDEAS
    7. 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.
    8. 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.
    9. Mark, Joy, 2011. "Gold and the US dollar: Hedge or haven?," Finance Research Letters, Elsevier, vol. 8(3), pages 120-131, September.
    10. Beckmann, Joscha & Berger, Theo & Czudaj, Robert, 2015. "Does gold act as a hedge or a safe haven for stocks? A smooth transition approach," Economic Modelling, Elsevier, vol. 48(C), pages 16-24.

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