|Researchers:||Loriana Pelizzon, Michael Schneider, Marti Subrahmanyam, Davide Tomio, Jun Uno, Clara Vega|
|Category:||Financial Markets, Systemic Risk Lab|
This project was part of the team project "The Impact of Quantitative Easing and the Zero Lower Bound on Asset Prices".
Topic & Objectives
The objective for this project was to study the effect of quantitative easing (QE) by Federal Reserve System (FED) and Bank of Japan (BoJ) on Treasury bond market liquidity, arbitrage opportunities and Treasury bond yields.
We used millisecond-stamped data from the Mercato dei Titoli di Stato (MTS) cash Treasury bond and focused on the dynamic of liquidity in the sovereign bond market as well as the change in the dynamic of liquidity spillover due to QE interventions. Modeling the dynamics of (il) liquidity across assets was an important yet complicated task, especially when considering significant deteriorations of liquidity conditions. Here we propose a peak-over-threshold method to identify abrupt liquidity drops from limit order book data and we model the time-series of these illiquidity events across multiple assets as a multivariate Hawkes process. This allowed us to quantify both the self-excitation of extreme changes of liquidity in the same asset (illiquidity spirals) and the cross-excitation across different assets (illiquidity spillovers). Applying the method to the MTS sovereign bond market, we found significant evidence for both illiquidity spillovers and spirals. The proportion of shocks explained by illiquidity spillovers roughly doubled from 2011 to 2015, suggesting an increased synchronization of extreme illiquidity across assets that the QE has also amplified.
- Market liquidity is more fragile and less predictable when an asset is very illiquid.
- The response to shocks in the extremes is structurally different from the regular response.
|Fabrizio Lillo, Loriana Pelizzon, Michael Schneider||
Modelling Illiquidity Spillovers with Hawkes Processes: An Application to the Sovereign Bond Market
|2018||Financial Markets, Systemic Risk Lab||Liquidity, Jump detection, Hawkes processes, Government bonds, MTS bond market|
|183||Joost Driessen, Theo E. Nijman, Zorka Simon||The Missing Piece of the Puzzle: Liquidity Premiums in Inflation-Indexed Markets||2017||Financial Markets, Systemic Risk Lab||Liquidity premium, liquidity risk, TIPS, inflation swaps, TIPS–Treasury puzzle|
|151||Fabrizio Lillo, Loriana Pelizzon, Michael Schneider||How Has Sovereign Bond Market Liquidity Changed? - An Illiquidity Spillover Analysis||2016||Financial Markets, Systemic Risk Lab||Liquidity, jump detection, Hawkes processes, government bonds, MTS bond market, Quantitative Easing.|