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Implications for liquidity from innovation and transparency in the European corporate bond market


  • Marco Laganá
  • Martin Perina
  • Isabel von Köppen-Mertes
  • Avinash Persaud


This paper offers a new framework for the assessment of financial market liquidity and identifies two types: search liquidity and systemic liquidity. Search liquidity, i.e. liquidity in “normal” times, is driven by search costs required for a trader to find a willing buyer for an asset he/she is trying to sell or vice versa. Search liquidity is asset specific. Systemic liquidity, i.e. liquidity in “stressed” times, is driven by the homogeneity of investors - the degree to which one’s decision to sell is related to the decision to sell made by other market players at the same time. Systemic liquidity is specific to market participants’ behaviour. This framework proves fairly powerful in identifying the role of credit derivatives and transparency for liquidity of corporate bond markets. We have applied it to the illiquid segments of the European credit market and found that credit derivatives are likely to improve search liquidity as well as systemic liquidity. However, it is possible that in their popular use today, credit derivatives reinforce a concentration of positions that can worsen systemic liquidity. We also found that post-trade transparency has surprisingly little bearing on liquidity in that where it improves liquidity it is merely acting as a proxy for pre-trade transparency or transparency of holdings. We conclude that if liquidity is the objective, pre-trade transparency, as well as some delayed transparency on net exposures and concentrations, is likely to be more supportive of both search and systemic liquidity than post-trade transparency. JEL Classification: G14, G15, G18.

Suggested Citation

  • Marco Laganá & Martin Perina & Isabel von Köppen-Mertes & Avinash Persaud, 2006. "Implications for liquidity from innovation and transparency in the European corporate bond market," Occasional Paper Series 50, European Central Bank.
  • Handle: RePEc:ecb:ecbops:20060050

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    References listed on IDEAS

    1. Sakellaris, Plutarchos & Vijselaar, Focco, 2004. "Capital quality improvement and the sources of growth in the euro area," Working Paper Series 368, European Central Bank.
    2. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
    3. Willman, Alpo, 2002. "Euro area production function and potential output: a supply side system approach," Working Paper Series 0153, European Central Bank.
    4. Albers, Ronald & Vijselaar, Focco, 2002. "New technologies and productivity growth in the euro area," Working Paper Series 0122, European Central Bank.
    5. Temin, Peter, 1997. "The Golden Age of European growth: A review essay," European Review of Economic History, Cambridge University Press, vol. 1(01), pages 127-149, April.
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    Cited by:

    1. Stellner, Christoph & Klein, Christian & Zwergel, Bernhard, 2015. "Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 538-549.
    2. Felton, Andrew & Reinhart, Carmen M. (ed.), 2009. "The First Global Financial Crisis of the 21st Century Part II: June–December, 2008," Vox eBooks, Centre for Economic Policy Research, number p199.
    3. Calice, Giovanni, 2011. "The Impact of Collateral Policies on Sovereign CDS Spreads," ECMI Papers 12234, Centre for European Policy Studies.

    More about this item


    Financial market functioning; liquidity; transparency; credit markets and financial innovation.;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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