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Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market
Open accessAbstract
Do bond investors demand credit quality or liquidity?The answer is both, but at different times and for different reasons.Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a nontrivial role, especially for low credit risk countries and during times of heightened market uncertainty.In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity.We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.
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Citations
Cited by
The effect of pro-environmental preferences on bond prices: Evidence from green bonds
Zerbib, O. D. (2019) · Journal of Banking & Finance · doi:10.1016/j.jbankfin.2018.10.012 · Cited by 1,379
The EMU sovereign-debt crisis: Fundamentals, expectations and contagion
Arghyrou, M. G., & Kontonikas, A. (2012) · Journal of International Financial Markets, Institutions and Money · doi:10.1016/j.intfin.2012.03.003 · Cited by 458
What Explains the Surge in Euro Area Sovereign Spreads during the Financial Crisis of 2007–09?
Attinasi, M.-G., Checherita, C., & Nickel, C. (2010) · Public Finance and Management · doi:10.1177/152397211001000403 · Cited by 312
What drives spreads in the euro area government bond market?
Manganelli, S., & Wolswijk, G. (2009) · Economic Policy · doi:10.1111/j.1468-0327.2009.00220.x · Cited by 301
Baur, D. G., & McDermott, T. K. J. (2016) · Journal of Behavioral and Experimental Finance · doi:10.1016/j.jbef.2016.03.002 · Cited by 266
Metadata
- Authors
- Beber, A., Brandt, M. W., & Kavajecz, K. A.
- Venue
- Review of Financial Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 2008-02-09
- Volume
- 22
- Issue
- 3
- Pages
- 925-957
- ISSN
- 0893-9454 (ISSN-L)
- 1465-7368
- OpenAlex
- W3121813836
- Cited by
- 704
- References
- 0
- FWCI
- 51.32
- Type
- journal article
- Language
- en
- Open access
- bronze
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- Beber, A., Brandt, M. W., & Kavajecz, K. A. (2009). Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market. Review of Financial Studies. https://doi.org/10.1093/rfs/hhm088
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