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Title:The term structure of bond market liquidity conditional on the economic environment: An analysis of government guaranteed bonds PDF Logo
Authors:Schuster, Philipp
Uhrig-Homburg, Marliese
Issue Date:2012
Series/Report no.:Working Paper Series in Economics, Karlsruher Institut für Technologie (KIT) 45
Abstract:We analyze the term structure of illiquidity premiums as the difference between the yield curves of two major bond segments that are both government guaranteed but differ in their liquidity. We show that its characteristics strongly depend on the economic situation. In crisis times, illiquidity premiums are higher with the largest increase for short-term maturities. Moreover, their reaction to changes in fundamentals is only significant during crises: premiums of all maturities depend on inventory risk, short maturities are highly sensitive to liquidity preferences (flight-to-liquidity). Therefore, calibrating risk management models in normal times underestimates illiquidity risk and misjudges term structure effects.
Subjects:bond liquidity
term structure of illiquidity premiums
regime-switching
financial crisis
flight-to-liquidity
JEL:G01
G11
G12
G13
Persistent Identifier of the first edition:urn:nbn:de:swb:90-309642
Document Type:Working Paper
Appears in Collections:Working Paper Series in Economics, Karlsruher Institut für Technologie (KIT)

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