European bond markets: do illiquidity and concentration aggravate price shocks?

Abstract

We study the effects of market liquidity and ownership concentration of European bonds on price volatility during periods of market stress. Specifically, using security-by-security data from euro area investors we examine if market illiquidity and concentrated holdings explain the large price shocks witnessed during the 2013 Taper Tantrum and 2015 Bund Tantrum. Results suggest that market illiquidity, as measured by bid–ask spreads and a new Bloomberg liquidity measure, is a strong and statistically significant driver of price volatility in European bonds during both periods. Concentrated bond holdings have a significant upward effect on volatility only during the Bund Tantrum.