TY  - JOUR
AU  - Beber,Alessandro
AU  - Brandt,Michael W.
AU  - Kavajecz,Kenneth A.
TI  - Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12376
PY  - 2006
Y2  - July 2006
UR  - http://www.nber.org/papers/w12376
L1  - http://www.nber.org/papers/w12376.pdf
N1  - Author contact info:
Alessandro Beber
Cass Business School
London
E-Mail: Alessandro.Beber.1@city.ac.uk

Michael W. Brandt
Fuqua School of Business
Duke University
One Towerview Drive
Durham, NC  27708
Tel: 919/660-1948
Fax: 919/660-8038
E-Mail: mbrandt@duke.edu

Kenneth Kavajecz
Finance Department
University of Wisconsin- Madison
975 University Ave.
Madison, WI  53706
E-Mail: kkavajecz@bus.wisc.edu
AB  - Do bond investors demand credit quality or liquidity? The answer is both, but at different times and for different reasons. Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a non-trivial role especially for low credit risk countries and during times of heightened market uncertainty. In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity. We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.
ER  -