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The Sovereign Debt Crisis: Rebalancing or Freezes?


Richter, Thomas Julian; Östberg, Per Nils Anders (2017). The Sovereign Debt Crisis: Rebalancing or Freezes? Swiss Finance Institute Research Paper 17-32, University of Zurich.

Abstract

Using high-frequency data we document that episodes of market turmoil in the European sovereign bond market are on average associated with large decreases in trading volume. The response of trading volume to market stress is conditional on transaction costs. Low transaction cost turmoil episodes are associated with volume increases (investors rebalance), while high transaction cost turmoil periods are associated with abnormally low volume (market freezes). We find suggestive evidence of market freezes in response to shocks to the risk bearing capacity of market makers while investor rebalancing is triggered by wealth shocks. Overall, our results show that the recent sovereign debt crisis was not associated with large-scale investor rebalancing.

Abstract

Using high-frequency data we document that episodes of market turmoil in the European sovereign bond market are on average associated with large decreases in trading volume. The response of trading volume to market stress is conditional on transaction costs. Low transaction cost turmoil episodes are associated with volume increases (investors rebalance), while high transaction cost turmoil periods are associated with abnormally low volume (market freezes). We find suggestive evidence of market freezes in response to shocks to the risk bearing capacity of market makers while investor rebalancing is triggered by wealth shocks. Overall, our results show that the recent sovereign debt crisis was not associated with large-scale investor rebalancing.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:30 October 2017
Deposited On:19 Dec 2017 13:56
Last Modified:29 Jul 2018 06:57
Series Name:Swiss Finance Institute Research Paper
Number of Pages:54
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://ssrn.com/abstract=3060504
Other Identification Number:merlin-id:15492

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