Funding Constraints and Market Illiquidity in the European Treasury Bond Market

MARkET AND FUNDING IllIQUIDITy: WhEN PRIVATE RISk BECOMES PUBlIC

The market turbulence that began in July 2007 stemmed initially from credit prospects deteriorating in U.S. subprime mortgages, but quickly spread to other markets. Growing uncertainty surrounding the valuation of structured credit instruments affected their liquidity, leading to difficulties in the asset-backed commercial paper (ABCP) market, where these instruments were partly funded. Illiqui...

Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market

Using high-frequency transaction data for the three largest European markets (France, Germany and Italy), this paper documents the existence of an asymmetric relationship between market liquidity and trading imbalances: when quoted spreads rise (fall) and liquidity falls (increases) buy (sell) orders tend to prevail. Risk-averse market-makers, with inventory-depletion risk being their main conc...

Price Discovery in the European Bond Market

What is a benchmark bond? We provide a formal theoretical treatment of this concept and derive its implications. We describe a rich but little used econometric technique for identifying the benchmark that is congruent with our theoretical framework. We apply this to the natural experiment that occurred when benchmark status was contested in the European bond market following the introduction of...

Pricing Bond Yields in the European Bond Market

Systemic Illiquidity in the Federal Funds Market

This paper shows how the intraday allocation and pricing of overnight loans of federal funds reflect the decentralized interbank market in which these loans are traded. A would-be borrower or lender typically finds a counterparty institution by direct bilateral contact. Once in contact, the two counterparties to a potential trade negotiate terms that reflect their incentives for borrowing or le...