A Study of the Euro-zone Crisis

OMI Seminar Series

We study market microstructure and liquidity in the Italian sovereign bond market, the largest in the Euro-zone, using a unique new dataset, recently obtained from the Mercato Telematico dei Titoli di Stato (MTS), which provides tick-by-tick trade and quote data from individual broker-dealers. Our data cover the sovereign bonds of most European Union countries, for the period June 1, 2011 to November 15, 2012, which includes the Euro-zone crisis period. This database is unique for any market, in that it allows us to track individual orders and their revisions during the trading day. We document the strong non-linear relationship between changes in Italian sovereign risk and liquidity in the secondary bond market. We pinpoint which subset of bonds was the least affected by the worsening of the crisis, in terms of liquidity, and to what extent it was resilient to the deterioration of Italy’s creditworthiness. We document that, under conditions of stress, a fraction of market makers withdraws from the market and frequent quote revisions do not necessarily translate into higher liquidity. We also examine how liquidity improved after intervention by the European Central Bank (ECB), through its Long-Term Refinancing Operations (LTRO) and Outright Monetary Transactions (OMT) programs, starting in December 2011. Thus, we are able to assess the efficacy of the intervention by studying the changing interaction between the liquidity measures and credit default swap (CDS) spreads, to examine whether the intervention was successful in ameliorating credit risk and illiquidity.



Loriana Pelizzon (Universita' Ca' Foscari di Venezia)

Tuesday, April 23, 2013 - 12:30
to 13:30