Amid increasing regulation, structural changes of the market and Quantitative
Easing as well as extremely low yields, concerns about the market liquidity of the Eurozone sovereign debt markets have been raised. We aim to quantify illiquidity risks, especially such related to liquidity dry-ups, and illiquidity spillover across maturities by examining the reaction to illiquidity
shocks at high frequencies in two ways: a) the regular response to shocks using a variance decomposition and b) the response to shocks in the extremes by detecting illiquidity shocks and modeling those as multivariate Hawkes processes. We find that a) market liquidity is more fragile and less predictable when an asset is very illiquid and b) the response to shocks in the extremes is structurally different from the regular response. In 2015 long-term bonds are less liquid and the medium-term bonds are liquid, although we observe that in the extremes the medium-term bonds are increasingly driven by illiquidity spillover from the long-term titles.
