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Risk aversion and Uncertainty in European Sovereign Bond Markets

Author

Listed:
  • 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.

Suggested Citation

  • Fourel, V. & Idier, J., 2011. "Risk aversion and Uncertainty in European Sovereign Bond Markets," Working papers 349, Banque de France.
  • Handle: RePEc:bfr:banfra:349
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_349_2011.pdf
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    References listed on IDEAS

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    6. David Easley & Maureen O'Hara, 2010. "Microstructure and Ambiguity," Journal of Finance, American Finance Association, vol. 65(5), pages 1817-1846, October.
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    Cited by:

    1. Eric Ghysels & Julien Idier & Simone Manganelli & Olivier Vergote, 2017. "A High-Frequency assessment of the ECB Securities Markets Programme," Journal of the European Economic Association, European Economic Association, vol. 15(1), pages 218-243.

    More about this item

    Keywords

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

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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