The determinants of liquidity commonality in the Euro-area sovereign bond market

Abstract

We examine time-series variation in liquidity commonality across sovereign benchmark bonds from 10 Euro-area countries, over a 7-year period using tick-by-tick data from the inter-dealer market and study how it is driven by supply determinants (funding constraints of financial intermediaries) and demand determinants (investor sentiment, uncertainty, and cross-market linkages with the equity market) of liquidity. Commonality in liquidity does change over time, tends to intensify in stress periods as well as around ECB policy meetings, and we find stronger evidence in favor of the supply side determinants.