Liquidity and credit risk premia in government bond yields
AbstractThis paper quantifies liquidity and credit premia in German and French government bond yields. For this purpose, we estimate term structures of government-guaranteed agency bonds and exploit the fact that any difference in their yields vis-`a-vis government bonds can be attributed to differences in liquidity premia. Adding the information on risk-free rates, we obtain model-free and model-based gauges of sovereign credit premia, which are an important alternative to the information based on CDS markets. The results allow us to quantify the price impact of so-called “safe haven flows”, which strongly affected bond markets in late 2008/early 2009 and again during some phases of the sovereign debt crisis. Thus, we show to what extent these effects disguised the increase of sovereign credit premia in the government yields of core euro area countries. JEL Classification: E44, G12, G01
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1440.
Date of creation: Jun 2012
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Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-08 (All new papers)
- NEP-CBA-2012-07-08 (Central Banking)
- NEP-EEC-2012-07-08 (European Economics)
- NEP-FMK-2012-07-08 (Financial Markets)
- NEP-UPT-2012-07-08 (Utility Models & Prospect Theory)
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.:
- Ejsing, Jacob & Lemke, Wolfgang, 2011. "The Janus-headed salvation: Sovereign and bank credit risk premia during 2008-2009," Economics Letters, Elsevier, vol. 110(1), pages 28-31, January.
- Michael J. Fleming, 2001.
"Measuring treasury market liquidity,"
133, Federal Reserve Bank of New York.
- Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
- Olivier Renault & Jan Ericsson, 2000.
"Liquidity and Credit Risk,"
FMG Discussion Papers
dp362, Financial Markets Group.
- 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.
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