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A composite indicator of sovereign bond market liquidity in the euro area

Author

Listed:
  • Riccardo Poli

    (Bank of Italy)

  • Marco Taboga

    (Bank of Italy)

Abstract

We propose a methodology to build and validate a composite indicator of the market liquidity of euro-area sovereign bonds. The indicator aggregates several metrics from different trading venues, with the aim of providing a comprehensive measurement of prevailing bond-market liquidity conditions in the four largest euro-area economies (Germany, France, Italy and Spain). The composite indicator, which starts in 2010, allows us to put into historical context the sharp liquidity deterioration experienced at the height of the COVID-19 crisis. The deterioration was comparable to, although slightly less severe than, that experienced during the European sovereign debt crisis. However, while at the time the impairment in liquidity conditions had lasted for more than two years, this time it was quickly re-absorbed. We provide some evidence that the promptness and boldness of the ECB’s interventions in 2020 could help to explain this difference: according to our indicator, the announcements of the Pandemic Emergency Purchase Programme and other policy measures having an explicit market stabilization function were immediately followed by significant improvements in the liquidity of sovereign bonds.

Suggested Citation

  • Riccardo Poli & Marco Taboga, 2021. "A composite indicator of sovereign bond market liquidity in the euro area," Questioni di Economia e Finanza (Occasional Papers) 663, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_663_21
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2021-0663/QEF_663_21.pdf
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    4. Berardi, Andrea, 2023. "Term premia and short rate expectations in the euro area," Journal of Empirical Finance, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    market liquidity; sovereign bonds; market microstructure; Covid-19;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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