The Sovereign Debt Crisis: Rebalancing or Freezes?

Per Östberg and Thomas Richter
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Per Östberg: University of Zurich and Swiss Finance Institute
Thomas Richter: University of Zurich and Swiss Finance Institute

No 17-32, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Using high-frequency data we document that episodes of market turmoil in the European sovereign bond market are on average associated with large decreases in trading volume. The response of trading volume to market stress is conditional on transaction costs. Low transaction cost turmoil episodes are associated with volume increases (investors rebalance), while high transaction cost turmoil periods are associated with abnormally low volume (market freezes). We find suggestive evidence of market freezes in response to shocks to the risk bearing capacity of market makers while investor rebalancing is triggered by wealth shocks. Overall, our results show that the recent sovereign debt crisis was not associated with large-scale investor rebalancing.

Keywords: Sovereign Debt Crisis; Trading Volume; Liquidity; Flights; Rebalancing (search for similar items in EconPapers)
JEL-codes: E44 G12 G14 G21 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2017-10
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1732

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