Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/208310
Authors: 
Oprică, Silviu
Weistroffer, Christian P.
Year of Publication: 
2019
Series/Report no.: 
ECB Working Paper No. 2276
Abstract: 
Using newly available information on euro area sectoral holdings of securities, this paper investigates to what extent the presence of institutional investors affects volatility and liquidity in secondary bank bond markets. We find that non-bank financial intermediaries, in particular money market funds (MMFs), have a positive impact on secondary bank bond markets' liquidity conditions, at the cost of significantly increasing volatility of daily returns. The effect translates to more than a 19% improvement in liquidity conditions and up to 57% increase in daily-return volatility, assuming MMFs hold about 10% of the notional amount in the secondary market of a representative euro area bank bond. The effect is relative to the impact the non-financial private sector has on markets. Investment funds, insurance corporations and pension funds are found to similarly affect market conditions, though to a lesser magnitude. We find a trade-off between volatility and liquidity, where the stronger presence of institutional investors at the same time improves liquidity and increases volatility. The results suggest that possible structural shifts in investor composition matter for market conditions and should be monitored by financial stability authorities.
Subjects: 
Financial Markets
Institutional Ownership
Bond Liquidity
Securities Holdings
Generalized Method of Moments
JEL: 
G10
G15
G23
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3538-8
Document Type: 
Working Paper

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