A Composite Indicator of Sovereign Bond Market Liquidity in the Euro Area

ABSTRACT We propose a methodology to build and validate a composite indicator of the market liquidity of euro‐area sovereign bonds, with the aim of providing a comprehensive assessment of liquidity conditions in several different trading venues and countries. The composite indicator, which starts in 2010, allows us to put into historical context the liquidity deterioration observed during the Covid‐19 crisis, which was almost as severe as that experienced during the European sovereign debt crisis. While the latter impairment in liquidity conditions lasted for more than 2 years, the most recent one was quickly reabsorbed. We provide evidence that the promptness and boldness of the European Central Bank's interventions in 2020 could contribute to explain this difference: according to our indicator, the announcements of some monetary policy measures having an explicit market stabilization function were followed by significant improvements in the liquidity of sovereign bonds.