Prof. Mary Pieterse-Bloem (Erasmus School of Economics) speaks at the ESM

"Expected issuance fees and market liquidity"

Synopsis:

We examine the interaction between the primary and secondary markets for euro area sovereign bonds in the MTS market. We extend the analysis of market liquidity determinants by considering an issuance fee-driven liquidity mechanism in the euro area sovereign bond market. This mechanism is driven by the dual role of investment banks as primary dealers in the secondary markets, as well as competitors for lead manager in the primary market. Sovereigns have the incentive to try to increase liquidity as this reduces their funding costs and select a lead manager from the pool of primary dealers based on their liquidity provision in the secondary market. As a result, market makers provide more liquidity than they are naturally inclined to do as they are competing for primary issuance fees. Primary dealers compete to be selected as lead manager in the primary market, and have an incentive to increase liquidity. For our 2008 - 2012 sample of sovereign bonds from 11 euro area countries, we find that expected issuance fees are positively and economically related to market liquitidy. The fee-driven liquitidy effect is especially strong for countries with high funding needs, in periods of high re-financing uncertainty, and for low-risk bonds.

This is an ESM research internal seminar. If you would like to attend, please write an email to ESMresearch@esm.europa.eu