Dokument: Financial Market Behavior During the European Sovereign Debt Crisis - A Market Microstructure Approach
| Titel: | Financial Market Behavior During the European Sovereign Debt Crisis - A Market Microstructure Approach | |||||||
| URL für Lesezeichen: | https://docserv.uni-duesseldorf.de/servlets/DocumentServlet?id=48112 | |||||||
| URN (NBN): | urn:nbn:de:hbz:061-20190104-114214-6 | |||||||
| Kollektion: | Dissertationen | |||||||
| Sprache: | Englisch | |||||||
| Dokumententyp: | Wissenschaftliche Abschlussarbeiten » Dissertation | |||||||
| Medientyp: | Text | |||||||
| Autor: | Zimmermann, Marco [Autor] | |||||||
| Dateien: |
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| Beitragende: | Prof. Dr. Smeets, Heinz-Dieter [Gutachter] Prof. Dr. Heimeshoff, Ulrich [Gutachter] | |||||||
| Dewey Dezimal-Klassifikation: | 300 Sozialwissenschaften, Soziologie » 330 Wirtschaft | |||||||
| Beschreibung: | After the demise of Lehman Brothers in autumn 2008, the financial crisis spread extensively to Europe. It was notably followed by a deceleration in economic activity in 2009, with negative growth rates that were the largest in many countries since the Great Depression in the 1930s. The third stage of the crisis began early in 2010 when Greece - later followed by Ireland, Portugal, Italy, Spain and more recently Slovenia and Cyprus - came under pressure from a strong increase in sovereign debt, a persistent instability of their financial sectors, bursting housing bubbles and a further slowdown in economic activity. Beginning in late 2009, investors responded by demanding higher yields on Greek debt securities and gradually began driving up yields on sovereign bonds of other eurozone member states. As a consequence, these countries' governments became temporarily unable to cover their financial needs by issuing bonds at "affordable" interest rates, which in many cases made loan agreements by European countries, the International Monetary Fund and newly-established special purpose vehicles necessary. Since then, capital markets have calmed down not because European economies have engaged in austerity, but because the European Central Bank is intervening by purchasing sovereign bonds in the secondary market and has promised to do "whatever it takes to preserve the euro".
The European sovereign debt crisis has revived the debate of policymakers and academics on the determinants and dynamics of market liquidity. While liquid financial markets have long been taken for granted, the crisis has shown that a sudden shortage can easily occur. The present dissertation contributes to the debate on market liquidity during the European sovereign debt crisis. In particular, it provides new evidence on market-making activities in sovereign bond trading and outlines a number of policy implications that, if pursued, may support market liquidity in Europe's fixed-income markets. Chapter 2, entitled "Characterization of European sovereign bond markets", introduces the asset class of sovereign bonds. Even if European national treasuries have made an effort to harmonize the design of their debt obligations in recent decades, differences in terms, structures, requirements and other details remain. To better understand the peculiarities and similarities, we give an introduction to the terminology of bonds and present some stylized facts of European government debt obligations. In the further course of the chapter, we discuss organizational features of issuing new debt on Europe's primary markets. We work out issuance strategies and methods as well as associated factors of debt management, risk control, investor base and investor relationships. Additionally, we introduce types of negotiations, trading mechanisms, roles for dealers and intermediaries, competition among investors and the level of market transparency in secondary bond markets. Finally, we present stylized facts of the largest electronic interdealer platform for trading euro-denominated sovereign bonds, MTS. These insights lay the foundation for the empirical investigations in the further course of this thesis. Due to the bulk of sovereign debt obligations in circulation, many bond markets are characterized by temporary imbalances in the inflow of buy and sell orders. To ensure continuous trading opportunities, selected market participants serve a crucial role in these markets by posting executable bid and offer prices. Recent developments suggest that the behavior of these liquidity providers may have changed during the crisis. Against this background, Chapter 3, entitled "Insights from market microstructure theory on dealer markets", focuses on the theoretical analysis of market-making activities of liquidity suppliers and its implications for the price discovery process in dealer markets. We follow the evolution of the theoretical literature on market microstructure and discuss firstly the three "traditional" sources of trading costs a dealer is typically confronted with; namely order processing costs, inventory holding costs and costs due to information asymmetries in the market. Since most of today's trading in European sovereign bonds is characterized by a multiple dealer structure, we turn our attention later to a competitive market-making framework and study the role of interdealer trading on the price formation process. The chapter closes with a summary of empirically testable price implications. Chapter 4, entitled "Decomposition of bid-ask spreads in European fixed-income markets", examines the determinants and dynamics of liquidity in European fixed-income markets during the sovereign debt crisis. We recapitulate the market microstructure framework of Huang and Stoll (1997) and extend their spread decomposition model to capture intrinsic features of bond trading: interdealer inventory trading, order splitting, market-wide and country-specific trends, term-to-maturity effects as well as weekday and intraday patterns. Using high-frequency quote and trade data from the largest electronic interdealer platform for trading euro-denominated fixed-income securities, MTS, we find that trading on private information is rather less important in sovereign bond markets. Dealers only request compensation at the beginning of the trading week and the trading day when trading activity is fairly low and information asymmetries likely. Due to the local competitor, EUREX, and parallel price discovery processes, insider trading is relevant in the market for German bonds. Inventory control only plays a marginal role in dealers' decision of setting the bid-ask spread. It seems to be more likely that dealers actively trade and hedge imbalances. Market-wide trends in buying or selling are as important as the two traditional asset-specific spread components combined. Chapter 4 leaves open the question of whether other factors may influence the price-setting behavior of liquidity providers in Europe's bond markets or not. Against this background, Chapter 5, entitled "The influence of political communication on the price discovery process in sovereign bond markets", aims to shed light on the signaling effects of political communication on sovereign bond trading in times of financial crisis. Our data sample covers high-frequency quote and trade data of more than 500 euro-denominated sovereign bonds for the period between January 2 and June 28, 2013, when the bailout of Cyprus caused heated debates on bank deposit levies and bail-in procedures. Within the framework of a market microstructure approach, we find press conferences, speeches, interviews and written statements of political actors to have demonstrable effects on the quoting behavior of institutional investors. Communications on attempts to break the sovereign-bank nexus have a coordinating and soothing effect, while discussions on Cyprus' role as a template for future rescue measures trouble the markets. However, the impact holds for a maximum of 30 minutes and largely depends on the originator of the statement. We conclude that in times of market uncertainty, public signals can be an important source for investment decisions in sovereign bond markets. To have a lasting effect, however, a coherent communication strategy is necessary. Chapter 6, entitled "Did the EU summits succeed in convincing the markets during the recent crisis?", slightly changes our perspective. We analyze the price impact of European Council meetings on Europe's financial markets during the peak of the sovereign debt crises. Therewith, we follow our present argumentation that public information may be an important signaling device in times of economic and financial crisis. However, we zoom out of the tight analysis of market-making activities in secondary bond market trading and also expand the focus to equity and forex markets. Using an event study approach, this chapter examines whether crisis meetings of European heads of state and government, as well as their agreed and communicated results, had a significant impact on financial markets. The analysis is based on daily data for seven member states of the eurozone (France, Germany, Greece, Ireland, Italy, Portugal and Spain), starting in autumn 2008 and covering the time period until April 2012. We find the high-profile meetings to have only minor effects that ceased quickly. Only Germany was able to profit from sustainably better market conditions after meetings. As opposed to this, first and foremost Greece faced partly severe negative effects. We conclude that investors consider Europe's economic and political crisis management insufficient and its communication strategy little convincing. While controlling for additional effects, we show that conventional and unconventional policy measures taken by the ECB have had short-run effects on bond returns and the exchange rate, but none of the intended influence on stock prices, with the exception of Italy. The article, on which this chapter is based, is co-authored by Prof. Dr. Heinz-Dieter Smeets and has been published in Journal of Common Market Studies, Vol. 51, No. 6, November 2013, pp. 1158--1177. | |||||||
| Lizenz: |  Urheberrechtsschutz | |||||||
| Fachbereich / Einrichtung: | Wirtschaftswissenschaftliche Fakultät » Volkswirtschaftslehre | |||||||
| Dokument erstellt am: | 04.01.2019 | |||||||
| Dateien geändert am: | 04.01.2019 | |||||||
| Promotionsantrag am: | 28.05.2018 | |||||||
| Datum der Promotion: | 29.10.2018 |
