Abstract
We study the market quality of Italian sovereign bonds during the COVID-19 pandemic, revealing its direct impact (represented by COVID-19 hospitalizations) and its indirect impact (channeled by the ECB monetary policy) on heightened volatility and deteriorated liquidity conditions during the first COVID-19 wave. We also uncover an additional channel by which the pandemic was costly for taxpayers: the surge of the auction premium. Our analysis shows that subsequent monetary policy measures effectively reduced volatility and the size of the premium during the second wave of the pandemic.
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All times in this paper refer to the Central European Time zone (CET).
MOT differs from MTS BondVision, the wholesale market for Italian Treasuries, in the size of lots traded (at least 2 million euros of lot size in MTS).
To check for robustness, we used alternative variables such as the number of new cases, the number of new positive testings, the number of new hospitalizations in intensive therapy and the ratio between positive and total number of tests. In all these cases, results are broadly in line with the proposed analysis. As a robustness check, we also explored the effect of interaction terms for past illiquidity affecting future volatility and vice versa, but these terms turned out not to be statistically significant.
An additional amount of 1.05, 0.119, 0.181, and 0.3 billion euros was allocated in a supplementary auction the following day. Since the price in the auction is fixed at the price of the ordinary auction, no primary dealers requested additional BTPs because the bond prices experienced a significant decline on the subsequent day, making the secondary market much more favorable than the primary market.
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Acknowledgements
Any views expressed are solely those of the authors and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee, Financial Policy Committee or Prudential Regulation Committee. We thank the participants of the Financial Engineering Workshop at Cass Business School (27 January 2021), the Financial Computing and Analytics Group Seminar at University College London (10 March 2021), the 24th Central Bank Macroeconomic Modeling Workshop (13 October 2021) and the 2021 International Finance and Banking Society (IFABS) Oxford Conference (15 September 2021) for comments. We also thank Mario Bellia, Nicholas Vause, the Editorial Board of Bank Underground and anonymous referees for valuable comments. R. Renò acknowledges PRIN funding from MIUR, Italy, HiDEA Project 2017RSMPZZ. R. Renò acknowledge research support from the University of Verona. R. Renò and M. Flora thank Long-Term Investors@UniTo for financial support. We thank Borsa Italiana S.p.A. for providing the data set. Errors and omissions are our own.
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Ferrara, G., Flora, M. & Renò, R. The Impact of COVID-19 on Italian Sovereign Bond Market Quality. J Financ Serv Res 67, 55–71 (2025). https://doi.org/10.1007/s10693-024-00437-7
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DOI: https://doi.org/10.1007/s10693-024-00437-7