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Sovereign Bond-Backed Securities: A VAR-for-VaR and Marginal Expected Shortfall Assessment

Author

Listed:
  • De Sola Perea, Maite

    (National Bank of Belgium)

  • Dunne, Peter G.

    (Central Bank of Ireland)

  • Puhl, Martin

    (Oesterreichishe Nationalbank)

  • Reininger, Thomas

    (Oesterreichishe Nationalbank)

Abstract

Brunnermeier et al., (2017) propose a securitisation solution for the bank-sovereign doom-loop. This shields senior tranche investors from actual defaults but whether it stabilises flight-to-safety panics is unclear. We apply dynamic VaR and Marginal Expected Shortfall methods to assess whether real-time risks to investors are attenuated by holding sovereign bond-backed securities. Price dynamics are derived using a Monte Carlo method. We find that holders of the senior tranche would be as safe as holders of German bunds. Mezzanine risk exposure would be moderate. The junior tranche experiences less severe shocks than high-risk sovereigns. The proposal significantly reduces destabilising market dynamics.

Suggested Citation

  • De Sola Perea, Maite & Dunne, Peter G. & Puhl, Martin & Reininger, Thomas, 2018. "Sovereign Bond-Backed Securities: A VAR-for-VaR and Marginal Expected Shortfall Assessment," Research Technical Papers 3/RT/18, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:3/rt/18
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    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Sam Langfield & Marco Pagano & Ricardo Reis & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2017. "ESBies: safety in the tranches," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 32(90), pages 175-219.
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    Cited by:

    1. Clancy, Daragh & Dunne, Peter G. & Filiani, Pasquale, 2019. "Liquidity and tail-risk interdependencies in the euro area sovereign bond market," Research Technical Papers 11/RT/19, Central Bank of Ireland.
    2. Cronin, David & Dunne, Peter G., 2019. "How effective are sovereign bond-backed securities as a spillover prevention device?," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 49-66.
    3. Makushkin, Mikhail & Lapshin, Victor, 2020. "Modelling tail dependencies between Russian and foreign stock markets: Application for market risk valuation," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 57, pages 30-52.
    4. Peter G. Dunne, 2019. "Positive Liquidity Spillovers from Sovereign Bond-Backed Securities," JRFM, MDPI, vol. 12(2), pages 1-25, April.
    5. Clancy, Daragh & Gabriele, Carmine & Žigraiová, Diana, 2022. "Sovereign bond market spillovers from crisis-time developments in Greece," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    6. Frey, Rüdiger & Kurt, Kevin & Damian, Camilla, 2020. "How safe are european safe bonds? An analysis from the perspective of modern credit risk models," Journal of Banking & Finance, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Safe Assets; Sovereign Bonds; Value-at-Risk; Spillover; CAViaR; Co-Dependence;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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