Sovereign credit risk, liquidity, and European Central Bank intervention: Deus ex machina?

Loriana Pelizzon, Marti G. Subrahmanyam, Davide Tomio, Jun Uno

Research output: Contribution to journalArticle

28 Citations (Scopus)


We examine the dynamic relation between credit risk and liquidity in the Italian sovereign bond market during the eurozone crisis and the subsequent European Central Bank (ECB) interventions. Credit risk drives the liquidity of the market. A 10% change in the credit default swap (CDS) spread leads to a 13% change in the bid-ask spread, the relation being stronger when the CDS spread exceeds 500 basis points. The Long-Term Refinancing Operations of the ECB weakened the sensitivity of market makers’ liquidity provision to credit risk, highlighting the importance of funding liquidity measures as determinants of market liquidity.

Original languageEnglish
Pages (from-to)86-115
Number of pages30
JournalJournal of Financial Economics
Issue number1
Publication statusPublished - 2016 Oct 1



  • Credit risk
  • Eurozone sovereign bonds
  • Financial crisis
  • Liquidity
  • MTS bond market

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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