Debt–liquidity shock risk: intertemporal effects and probability measures

Bernardo Maggi

Journal of Risk

Abstract: ABSTRACT We analyze how the yield of government securities may be managed in order to save costs in the face of the risk of a liquidity shock. This issue is especially relevant for highly indebted countries that are under the threat of positive changes in the yields of public debt bonds. We study the liquidity features of the Italian government bond market with the twin aims of formalizing and estimating the intertemporal effects of a debt-liquidity shock on yields, with a view to understanding how to reduce costs when issuing new bonds, and evaluating the effectiveness of the average liquidity cost index by finding its conditional probability.

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