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Credit risk-free sovereign bonds under Solvency II: a cointegration analysis with consistently estimated structural breaks

Listed author(s):
  • Alexander Ludwig

European insurance and reinsurance undertakings are facing the advent of a new regulatory framework. In the current proposal for its technical specifications under the pillar 1 standard formula, sovereign debt of European Union (EU) member states is treated as risk-free. This article examines the validity of this assumption for 26 EU member states. Taking into account the possibility of multiple structural breaks, we find evidence for the convergence of government bond yields of several countries with the yields of a risk-free asset. For the majority of countries, however, there is no such evidence. A detailed discussion of regime shifts in relation to European bond market integration is provided. Our findings have important implications for insurance companies, bond investors and regulators alike.

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File URL: http://hdl.handle.net/10.1080/09603107.2014.909573
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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 24 (2014)
Issue (Month): 12 (June)
Pages: 811-823

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Handle: RePEc:taf:apfiec:v:24:y:2014:i:12:p:811-823
DOI: 10.1080/09603107.2014.909573
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