We evaluate a new test for distress, based on drift bursts, using the secondary market of Italian Treasury bonds in 2018. In May 2018, selling pressure in the secondary market due to a change of the Italian political scenario was not absorbed properly and caused overreaction, with direct costs in terms of harshened liquidity conditions, increased volatility and arbitrary wealth redistribution in favor of primary dealers. The new test proves to be a reliable tool for monitoring financial markets.
Detecting States of Distress in Financial Markets: The Case of the Italian Sovereign Debt
Flora M.;Renò R.
2022-01-01
Abstract
We evaluate a new test for distress, based on drift bursts, using the secondary market of Italian Treasury bonds in 2018. In May 2018, selling pressure in the secondary market due to a change of the Italian political scenario was not absorbed properly and caused overreaction, with direct costs in terms of harshened liquidity conditions, increased volatility and arbitrary wealth redistribution in favor of primary dealers. The new test proves to be a reliable tool for monitoring financial markets.
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