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Expectations and term premia in EFSF bond yields

Author

Listed:
  • Andrea Carriero

    (Queen Mary University of London, University of Bologna)

  • Lorenzo Ricci

    (ESM)

  • Elisabetta Vangelista

    (ESM)

Abstract

The European Financial Stability Facility (EFSF) was set up in June 2010 as a temporary crisis resolution mechanism. In October 2012, its tasks were taken over by European Stability Mechanism (ESM), a permanent institution with a capital-based structure. Liquidity conditions for EFSF bonds in the secondary market are different from those of large sovereign bond issuers, which affects bond pricing. This paper offers the first study of the term structure of EFSF bond yields and a decomposition into expected interest rates and risk premia, based on a state-of-the-art no-arbitrage term structure model. A joint model of the EFSF curve and the swap curve allows to further identify the liquidity and credit components of both yield curves and disentangle an additional element of liquidity typical of bonds. This component is closely related to the ECB monetary policy. This model can be extended to other supranational institutions.

Suggested Citation

  • Andrea Carriero & Lorenzo Ricci & Elisabetta Vangelista, 2022. "Expectations and term premia in EFSF bond yields," Working Papers 54, European Stability Mechanism.
    • Handle: RePEc:stm:wpaper:54
    as

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    File URL: https://www.esm.europa.eu/system/files/document/2022-07/ESM_WP_54.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Term structure; volatility; density forecasting; no arbitrage;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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