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Liquidity and credit premia in the yields of highly-rated sovereign bonds

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  • Ejsing, Jacob
  • Grothe, Magdalena
  • Grothe, Oliver

Abstract

This 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 differences in their yields vis-à-vis government bonds are mainly driven by liquidity effects. Adding information on benchmark rates, we estimate liquidity and credit premia as latent factors in a state-space framework. The results allow us, first, to quantify the price impact of safe-haven flows on sovereign yields, which strongly affected very liquid bond markets during the recent financial crisis. Second, we quantify credit premia for highly rated governments, offering an important alternative to the information based on CDS markets.

Suggested Citation

  • Ejsing, Jacob & Grothe, Magdalena & Grothe, Oliver, 2015. "Liquidity and credit premia in the yields of highly-rated sovereign bonds," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 160-173.
  • Handle: RePEc:eee:empfin:v:33:y:2015:i:c:p:160-173
    DOI: 10.1016/j.jempfin.2015.04.001
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    References listed on IDEAS

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    Cited by:

    1. De Santis, Roberto A. & Stein, Michael, 2016. "Correlation changes between the risk-free rate and sovereign yields of euro area countries," Working Paper Series 1979, European Central Bank.
    2. repec:jfr:ijfr11:v:9:y:2018:i:1:p:171-188 is not listed on IDEAS
    3. Magdalena Grothe & Aidan Meyler, 2018. "Inflation Forecasts: Are Market-Based and Survey-Based Measures Informative?," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 9(1), pages 171-188, January.
    4. Paul J.J. Welfens & Samir Kadiric, 2017. "Neuere Finanzmarktaspekte von Bankenkrise, QE-Politik und EU-Bankenaufsicht," EIIW Discussion paper disbei239, Universitätsbibliothek Wuppertal, University Library.
    5. Jakob de Haan & Marco Hoeberichts & Renske Maas & Federica Teppa, 2016. "Inflation in the euro area and why it matters," DNB Occasional Studies 1403, Netherlands Central Bank, Research Department.
    6. repec:eee:jimfin:v:75:y:2017:i:c:p:14-31 is not listed on IDEAS

    More about this item

    Keywords

    Liquidity premium; Sovereign credit risk; Yield curve modelling; Bond markets; State-space models;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G01 - Financial Economics - - General - - - Financial Crises

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