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

Author

Listed:
  • Laganá, Marco
  • Peřina, Martin
  • von Köppen-Mertes, Isabel
  • Persaud, Avinash

Abstract

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

  • Laganá, Marco & Peřina, Martin & von Köppen-Mertes, Isabel & Persaud, Avinash, 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:200650
    Note: 339068
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    References listed on IDEAS

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    3. 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.
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    6. Reinhart, Carmen, 2008. "The first global financial crisis of the 21st century: Introduction," MPRA Paper 13288, University Library of Munich, Germany.
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    9. Sánchez Muñoz, Carlos & Israël, Jean-Marc, 2007. "Towards harmonised balance of payments and international investment position statistics - the experience of the European compilers," Occasional Paper Series 67, European Central Bank.
    10. 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.
    11. Sturm, Michael & Gurtner, François, 2007. "Fiscal policy in Mediterranean countries: developments, structures and implications for monetary policy," Occasional Paper Series 69, European Central Bank.
    12. Thimann, Christian & Skala, Martin & Wölfinger, Regine, 2007. "The search for Columbus' egg: finding a new formula to determine quotas at the IMF," Occasional Paper Series 70, European Central Bank.
    13. Picón Aguilar, Carmen & Damia, Violetta, 2006. "Quantitative quality indicators for statistics: an application to euro area balance of payment," Occasional Paper Series 54, European Central Bank.
    14. Stiegert, Roger & Leiner-Killinger, Nadine & López Pérez, Víctor & Vitale, Giovanni, 2007. "Structural reforms in EMU and the role of monetary policy: a survey of the literature," Occasional Paper Series 66, European Central Bank.
    15. Bindseil, Ulrich & Sotamaa, Kai & Amado, Ricardo & Honings, Noëlle & Chiappa, Gigliola & Boux, Bérénice & Föttinger, Wolfgang & Ledoyen, Pierre & Schwartzlose, Henrik & van der Hoorn, Han & Monar, Fer, 2007. "The use of portfolio credit risk models in central banks," Occasional Paper Series 64, European Central Bank.
    16. Turunen, Jarkko & Musso, Alberto & Stocker, Marc & Gómez-Salvador, Ramón, 2006. "Labour productivity developments in the euro area," Occasional Paper Series 53, European Central Bank.
    17. Schmiedel, Heiko, 2007. "The economic impact of the Single Euro Payments Area," Occasional Paper Series 71, European Central Bank.
    18. Kenny, Geoff & Genre, Véronique & Bowles, Carlos & Friz, Roberta & Meyler, Aidan & Rautanen, Tuomas, 2007. "The ECB survey of professional forecasters (SPF) - A review after eight years' experience," Occasional Paper Series 59, European Central Bank.
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    21. de Beaufort Wijnholds, Johannes Onno & Søndergaard, Lars, 2007. "Reserve accumulation: objective or by-product?," Occasional Paper Series 73, European Central Bank.

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    Keywords

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    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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