Benchmark yield undershooting in the E.M.U
With the elimination of foreign exchange risk among the E.M.U.-member countries, the yield of, say, French benchmark government bonds (henceforth, the yield) should be equal to that of German bonds, plus some credit and liquidity premia. Since both premia are not likely to change substantially from one day to the other, the yield should move in tandem with the German one and the corresponding spread should remain relatively stable. Yet, the yield exhibits a small but economically and statistically significant undershooting in response to changes in the German one, as a result of which the spread tends to decline when the latter increases, and vice-versa. We propose that the undershooting is the product of lagged adjustment in the European bond portfolios that is driven by liquidity considerations and, in particular, by the possibility of excessive bond-price movements in response to changes in the German yield. The empirical results are consistent with this proposition and additionally suggest that the adjustment can last for as long as four days.
|Date of creation:||2002|
|Date of revision:|
|Contact details of provider:|| Postal: Neuer Jungfernstieg 21, D-20347 Hamburg|
Web page: http://www.econstor.eu/handle/10419/20
More information through EDIRC
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.:
- Shiller, Robert & Campbell, John, 1991.
"Yield Spreads and Interest Rate Movements: A Bird's Eye View,"
3221490, Harvard University Department of Economics.
- John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 495-514.
- John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
- Michael J. Fleming, 2001.
"Measuring treasury market liquidity,"
133, Federal Reserve Bank of New York.
- Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
- Paul Bennett & Kenneth Garbade & John Kambhu, 1999. "Enhancing the Liquidity of U.S. Treasury Securities in an Era of Surpluses," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-083, New York University, Leonard N. Stern School of Business-.
- Allen M. Poteshman, 2001. "Underreaction, Overreaction, and Increasing Misreaction to Information in the Options Market," Journal of Finance, American Finance Association, vol. 56(3), pages 851-876, 06.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Wolfgang Schulte & Roberto Violi, 2002.
"Interactions between cash and derivatives bond markets: some evidence for the euro area,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 222-267
Bank for International Settlements.
- Wolfgang Schulte & Roberto Violi, 2001. "Interactions between cash and derivatives bond markets: some evidence for the euro area," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 67-112 Bank for International Settlements.
- Stefan Gerlach, 1996. "Monetary policy and the behaviour of interest rates: are long rates excessively volatile?," BIS Working Papers 34, Bank for International Settlements.
When requesting a correction, please mention this item's handle: RePEc:zbw:hwwadp:26207. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.