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The Sovereign Debt Crisis: Flights or Freezes?


Östberg, Per; Richter, Thomas (2022). The Sovereign Debt Crisis: Flights or Freezes? SSRN 3060504, University of Zurich.

Abstract

Multiple asset pricing theories predict that large price changes should be associated with abnormal trading volume, inducing investor rebalancing and possibly leading to flights. In contrast, consistent with market microstructure theories, this paper documents freezes, a reduction in trading volume (approximately 30% relative to the previous trading week) during market stress episodes in the European sovereign bond market. We trace the market freezes to increasing transaction costs driven by reduced risk bearing capacity of market makers.

Abstract

Multiple asset pricing theories predict that large price changes should be associated with abnormal trading volume, inducing investor rebalancing and possibly leading to flights. In contrast, consistent with market microstructure theories, this paper documents freezes, a reduction in trading volume (approximately 30% relative to the previous trading week) during market stress episodes in the European sovereign bond market. We trace the market freezes to increasing transaction costs driven by reduced risk bearing capacity of market makers.

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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
Uncontrolled Keywords:Sovereign Debt Crisis, Trading volume, Liquidity, Flights, Rebalancing
Scope:Discipline-based scholarship (basic research)
Language:English
Date:2022
Deposited On:19 Sep 2022 06:09
Last Modified:06 Mar 2024 14:38
Series Name:SSRN
ISSN:1556-5068
Additional Information:JEL Classification: G12, G14, G21, E44
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.3060504
Other Identification Number:merlin-id:22734
  • Content: Published Version
  • Licence: Creative Commons: Attribution 4.0 International (CC BY 4.0)