The term structure of bond market liquidity conditional on the economic environment: An analysis of government guaranteed bonds

Philipp Schuster and Marliese Uhrig-Homburg

No 45, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: We analyze the term structure of illiquidity premiums as the difference between the yield curves of two major bond segments that are both government guaranteed but differ in their liquidity. We show that its characteristics strongly depend on the economic situation. In crisis times, illiquidity premiums are higher with the largest increase for short-term maturities. Moreover, their reaction to changes in fundamentals is only significant during crises: premiums of all maturities depend on inventory risk, short maturities are highly sensitive to liquidity preferences (flight-to-liquidity). Therefore, calibrating risk management models in normal times underestimates illiquidity risk and misjudges term structure effects.

Keywords: bond liquidity; term structure of illiquidity premiums; regime-switching; financial crisis; flight-to-liquidity (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 G13 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:45

DOI: 10.5445/IR/1000030964

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