We document a “flash” crash in the Italian debt market on May 29, 2018 which recovered in the subsequent two days. Selling pressure in the secondary mar- ket due to a change of the Italian political scenario was not absorbed properly and caused overreaction. Using a regime-switching model, we estimate a direct cost for Italian taxpayers around 450 million euros just in that week, due to auctions that were taking place on May 30, plus several long-term indirect costs in terms of increased volatility and harsher liquidity in the following months. Flash crashes represent thus a serious threat to financial stability even in systemic, economically central markets like sovereign debt.
The Italian debt not-so-flash crash
M. Flora;R. Renò
2021-01-01
Abstract
We document a “flash” crash in the Italian debt market on May 29, 2018 which recovered in the subsequent two days. Selling pressure in the secondary mar- ket due to a change of the Italian political scenario was not absorbed properly and caused overreaction. Using a regime-switching model, we estimate a direct cost for Italian taxpayers around 450 million euros just in that week, due to auctions that were taking place on May 30, plus several long-term indirect costs in terms of increased volatility and harsher liquidity in the following months. Flash crashes represent thus a serious threat to financial stability even in systemic, economically central markets like sovereign debt.
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