Credit risk in covered bonds
AbstractCovered bonds are a promising alternative for prime mortgage securitization. In this paper, we explore risk premia in the covered bond market and particularly investigate whether and how credit risk is priced. In extant literature, yield spreads between high-quality covered bonds and government bonds are often interpreted as pure liquidity premia. In contrast, we show that although liquidity is important, it is not the exclusive risk factor. Using a hand-collected data set of cover pool information, we find that the credit quality of the cover assets is an important determinant of covered bond yield spreads. This effect is particularly strong in times of financial turmoil and has a significant influence on the issuer's refinancing cost.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 21 (2013)
Issue (Month): C ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jempfin
Covered bonds; Credit risk; Cover pool; Financial crisis; Pfandbrief;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Deborah Gefang & Gary Koop & Simon Potter, 2011.
"Understanding Liquidity and Credit Risks in the Financial Crisis,"
1114, University of Strathclyde Business School, Department of Economics.
- Gefang, Deborah & Koop, Gary & Potter, Simon M., 2011. "Understanding liquidity and credit risks in the financial crisis," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 903-914.
- Deborah Gefang & Gary Koop & Simon M. Potter, 2010. "Understanding Liquidity and Credit Risks in the Financial Crisis," Working Paper Series 45_10, The Rimini Centre for Economic Analysis.
- Gefang, Deborah & Koop, Gary & Potter, Simon M., 2011. "Understanding Liquidity and Credit Risks in the Financial Crisis," SIRE Discussion Papers 2011-26, Scottish Institute for Research in Economics (SIRE).
- John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
- Kempf, Alexander & Korn, Olaf & Uhrig-Homburg, Marliese, 2012. "The term structure of illiquidity premia," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1381-1391.
- Stephen Morris & Hyun Song Shin, 2012. "Contagious Adverse Selection," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 1-21, January.
- Bernanke Ben S., 2009. "The Future of Mortgage Finance in the United States," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(3), pages 1-10, March.
- Long Chen & David A. Lesmond & Jason Wei, 2007. "Corporate Yield Spreads and Bond Liquidity," Journal of Finance, American Finance Association, vol. 62(1), pages 119-149, 02.
- Favero, Carlo A & Pagano, Marco & von Thadden, Ernst-Ludwig, 2008.
"How Does Liquidity Affect Government Bond Yields?,"
CEPR Discussion Papers
6649, C.E.P.R. Discussion Papers.
- Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004.
"Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market,"
NBER Working Papers
10418, National Bureau of Economic Research, Inc.
- Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
- Robert Ferstl & Josef Hayden, . "Zero-Coupon Yield Curve Estimation with the Package termstrc," Journal of Statistical Software, American Statistical Association, vol. 36(i01).
- Coroneo, Laura & Nyholm, Ken & Vidova-Koleva, Rositsa, 2008.
"How arbitrage-free is the Nelson-Siegel Model?,"
Working Paper Series
0874, European Central Bank.
- Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.