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Flight-to-liquidity flows in the euro area sovereign debt crisis

Author

Listed:
  • Juan Ángel García

    () (European Central Bank)

  • Ricardo Gimeno

    () (Banco de España)

Abstract

In periods of market stress, portfolio reallocations in bond markets reflect both safety and liquidity concerns. Using sovereign and national agency bonds, we construct indicators of liquidity premia in major euro area bond markets; we document the weakening of the correlation between core and periphery market liquidity during the euro area sovereign bond crisis; and we identify several episodes of significant flight-to-liquidity (FTL) flows above and beyond flight-to-safety (FTS) spells in the period 2009-13. We show that FTL flows led to significant inverse moves in sovereign bond yields in euro area core and periphery markets. Moreover, FTL flows triggered declines in core and periphery stock markets and are associated with lower macroeconomic confidence in the euro area as a whole, which underscores the importance of FTL episodes for investors and policymakers alike.

Suggested Citation

  • Juan Ángel García & Ricardo Gimeno, 2014. "Flight-to-liquidity flows in the euro area sovereign debt crisis," Working Papers 1429, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1429
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/14/Fich/dt1429e.pdf
    File Function: First version, December 2014
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    References listed on IDEAS

    as
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    Cited by:

    1. Sören Radde & Cristina Checherita-Westphal & Wei Cui, 2015. "Government Bond Liquidity and Sovereign-Bank Interlinkages," SFB 649 Discussion Papers SFB649DP2015-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

    More about this item

    Keywords

    liquidity premia; flight to liquidity; flight to safety; sovereign debt crisis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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