Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/67053 
Year of Publication: 
2012
Series/Report no.: 
KIT Working Paper Series in Economics No. 45
Publisher: 
Karlsruher Institut für Technologie (KIT), Institut für Volkswirtschaftslehre (ECON), Karlsruhe
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: 
Document Type: 
Working Paper

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