Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market

摘要: Do bond investors demand credit quality or liquidity? The answer is both, but at different times and for reasons. Using data on the Euro-area government market, which features a unique negative correlation between liquidity across countries, we show that bulk of sovereign yield spreads explained by differences in quality, though plays nontrivial role, especially low risk countries during heightened market uncertainty. In contrast, destination large flows into determined almost exclusively liquidity. We conclude matters valuation that, stress, chase liquidity, not quality.