Is market liquidity less resilient after the financial crisis? Evidence for US Treasuries

Carmen Broto and Matías Lamas

Economic Modelling, 2020, vol. 93, issue C, 217-229

Abstract: Understanding market liquidity resilience, i.e. the capacity of liquidity to absorb shocks, of United States Treasuries is crucial from a financial stability standpoint. The conventional resilience measure has limitations due to the use of the liquidity level. We propose a new complementary approach to analyze resilience based on liquidity volatility. For this purpose, we focus on the link between returns volatility and liquidity volatility, which is a relatively unexplored field. We fit a bivariate conditional correlation (CC-) GARCH model for the 10-year bond returns and five liquidity indicators from January 2003 to June 2016 to analyze persistence and spillovers between these variables in a parsimonious way. We find that after the crisis, spillovers between liquidity volatility and returns volatility are higher, feedback loops are more likely and volatility persistence is lower, which is consistent with a lower resilience. Our results help to explain recent episodes of high volatility in this market.

Keywords: Market liquidity; Volatility; US Treasuries; CC-GARCH model (search for similar items in EconPapers)
JEL-codes: C32 C58 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Is market liquidity less resilient after the financial crisis? Evidence for us treasuries (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:93:y:2020:i:c:p:217-229

DOI: 10.1016/j.econmod.2020.08.001

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