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Risk aversion and Uncertainty in European Sovereign Bond Markets

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  • Fourel, V.
  • Idier, J.

Abstract

Risk aversion and uncertainty are often both at play in market price determination, but it is empirically challenging to disentangle one from the other. In this paper we set up a theoretical model particularly suited for opaque over-the-counter markets that is shown to be empirically tractable. Based on high frequency data, we thus propose an evaluation of risk aversion and uncertainty inherent to the government bond markets in the euro area between 2007 and 2011. We particularly examine the impact of the European Central Bank Securities Markets Programme [SMP] implemented in May 2010 and re- activated in August 2011 to ease the pressure on the European sovereign bond markets. We show how this programme has killed market uncertainty but raised risk aversion for all countries except Greece in a risk-pooling mechanism: this can therefore weaken the impact of market interventions over the long-term.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 349.

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Length: 43 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bfr:banfra:349

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Related research

Keywords: MES; systemic risk; tail correlation; balance sheet ratios; panel.;

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  1. Peter G. Dunne & Michael J. Moore & Richard Portes, 2007. "Benchmark Status in Fixed-Income Asset Markets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9-10), pages 1615-1634.
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  6. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports 133, Federal Reserve Bank of New York.
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Cited by:
  1. Ghysels, Eric & Idier, Julien & Manganelli, Simone & Vergote, Olivier, 2013. "A high frequency assessment of the ECB Securities Markets Programme," CEPR Discussion Papers 9778, C.E.P.R. Discussion Papers.

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