Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market

Alessandro Beber (), Michael W. Brandt and Kenneth A. Kavajecz

No 12376, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Do bond investors demand credit quality or liquidity? The answer is both, but at different times and for different reasons. Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a non-trivial role especially for low credit risk countries and during times of heightened market uncertainty. In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity. We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.

JEL-codes: G0 G12 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-eec, nep-fin and nep-fmk
Note: AP IFM
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Citations: View citations in EconPapers (17)

Published as Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(3), pages 925-957, March.

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Journal Article: Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market (2009)
Journal Article: Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market (2009)
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