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dc.contributor.authorGALLIANI CLARAen_GB
dc.contributor.authorRESTI Andreaen_GB
dc.contributor.authorPETRELLA Giovannien_GB
dc.identifier.otherEUR 26498en_GB
dc.identifier.otherOP LB-NA-26498-EN-Nen_GB
dc.description.abstractIn this report we investigate the liquidity of the European fixed income market using a large sample of government, corporate and covered bonds. We construct a robust liquidity index, based on PCA, to aggregate several measures and proxies for liquidity and estimate a multivariate regression models to identify the main factors driving bond liquidity in ordinary times as well as in times of market stress. We find that European bond liquidity is driven by bonds’ specific characteristics such as duration, rating, amount issued and time to maturity. The sensitivity of bond liquidity to these factors is larger when markets are under stress. We also analyze the link between the liquidity of individual bonds and the liquidity of the market as a whole. This is done through the estimation a liquidity market model that controls for bonds’ duration and rating as well as for periods of market stress. Results show that the illiquidity of individual bonds follows the illiquidity of the market. This effect is more pronounced for bonds with longer duration and lower rating, especially in times of market stress. Our results confirm the importance of rating in driving asset allocation decision (flight-to-safety) and suggest specific interventions that regulators might consider to introduce. First, provided that duration plays a very important role in bond liquidity, bond eligibility for the purposes of the LCR might be subject to a penalization based on duration. Second, given that the size of the bond issue affects the liquidity, regulators might create incentives for plain vanilla issues and re-openings of old issues.en_GB
dc.description.sponsorshipJRC.G.1-Financial and Economic Analysisen_GB
dc.publisherPublications Office of the European Unionen_GB
dc.titleThe liquidity of corporate and government bonds: drivers and sensitivity to different market conditionsen_GB
dc.typeEUR - Scientific and Technical Research Reportsen_GB
JRC Directorate:Space, Security and Migration

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