Liquidity and regulation of sovereign bond markets after the great recession

This research investigates some aspects of the structure of European sovereign bond secondary market. European government bonds are standard financial instruments, traded in highly transparent markets. A good functioning of these markets provides an essential supportive environment for the primary market, by which Sovereign entities issue their bonds among investors. During the last decade, many factors have potentially affected the bond market’s structure: the US and UK financial crisis, the European sovereign crisis, the deflation and the non-standard monetary policies of ECB and other central banks, new regulatory frameworks for financial markets and banks (e.g., MIFID II and MIFIR). Looking at the period of the European debt crisis, the pricing in financial markets of sovereign credit risk has been a central topic for empirical research. In the first chapter, we study the links between credit default swaps (CDS) and bond spreads, the differences in the set of relevant determinants, the price discovery of sovereign credit risk and the impact of the entry into force of the European ban on naked CDS, approved by European authorities to contrast speculative activity against national public debts. Secondly, we focus on the Italian case. The wholesale secondary market of its securities is MTS. We provide an extensive study on the evolution of the microstructural liquidity conditions over the last decade. In order to investigate different dimensions of the market liquidity (quoting, trading and resiliency), we propose an analysis on several liquidity measures. The large set of measures on a unique dataset provides a complete view of the market structure, market makers’ behavior and price takers’ preferences. This analysis clearly highlights trends, causes and timing of structural variations in market liquidity in the last decade. Lastly, since MTS Italy is the secondary market that operates under the specialist system, the last chapter investigates some peculiar aspects of the incentives that probably affect specialists’ behavior. Differently from other markets, the Italian Treasury monitors the performance of specialists on MTS, in order to push them to provide high level of liquidity. Monitoring rules represent a sort of soft regulation applied on Italian government bond market. We investigate whether these rules and the correspondent public ranking system effectively affect market makers in their quoting decisions and, consequently, the liquidity conditions of order books. To the best of our knowledge, this is one of the very first studies to statistically assess the impact of this regime on specialists’ quoting preferences.