Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market

Beber, Alessandro; Brandt, Michael W.; Kavajecz, Kenneth A.

doi:10.1093/rfs/hhm088

Cited by 651 publications

(325 citation statements)

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“…However the impact of the liquidity is insignificant in the first sub-sample (the period before the financial crisis). In the second sub-sample (the period during the crisis) the effect of liquidity is significant, consistent with Beber et al (2009). The two macro factors (relative to GDP) and the global risk factor have also a positive and significant impact in the sovereign yield spread.…”

Section: Unbalanced Panel Regressionsupporting

confidence: 72%

“…In the first one the changes in the dependent variable are usually small, around 1.4 b.p., whereas in the second sub sample the changes are more substantial, around 12.2 b.p. It seems that the sensitivity of yield spreads to changes in CDS increased noticeably once the crisis started which supports the idea of a flight to quality in terms of Beber et al (2009) terminology. 24 The standard deviation of the following variables: CDS spread (lagged one day); interaction of total debt divided by GDP and the standard deviation of the difference between domestic and benchmark yields; and the correlation between domestic Government yield and benchmark yield are calculated for the five year's maturity.…”

Section: Unbalanced Panel Regressionmentioning

confidence: 57%

“…In all these papers the benchmark for comparing the yield spreads is based on the German 10-year bund or German zero coupon curves. Beber, Brandt and Kavajecz (2009), however, use as benchmark the Euro-swap curve and show that the bulk of yield spread is explained by differences in credit quality as measured by the CDS, whereas liquidity plays a nontrivial role especially for low credit risk countries and in times of high market uncertainty. In summary, most papers suggest that credit quality-related factors, common business cycle factors (international or EMU), and, to a lower extent, liquidity-related factors are critical drivers of sovereign yield differentials.…”

Section: Related Literature On Emu Sovereign Bond Spreadsmentioning

confidence: 99%

“…We use the CDS spreads as a proxy of the default risk premium as suggested in Beber et al (2009) 7 . As a measure of liquidity we use the bond's daily turnover volume; the difference between the domestic and benchmark economy serves to estimate the liquidity premium 8 .…”

Section: Theoretical Modelmentioning

confidence: 99%

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Towards a Common European Monetary Union Risk Free Rate

Mayordomo¹,

Peña²

2009

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A common European bond would yield a common European Monetary Union risk free rate. We present tentative estimates of this common risk free for the European Monetary Union countries from 2004 to 2009 using variables motivated by a theoretical portfolio selection model. First, we analyze the determinants of EMU sovereign yield spreads and find significant effects of the credit quality, macro, correlation, and liquidity variables. However, their effects are different before and after the current financial crisis, being stronger in the latter period. Robustness tests with different data frequencies, benchmarks, liquidity variables, cross section regressions and balanced panels confirm the initial results. We propose four different estimates of the common risk free rate and show that, in most cases, this common rate could imply savings in borrowing costs for all the countries involved. it for a given set of countries and discuss its uses for monetary policy management and its implication for financial markets' integration. The results suggest that this common rate, in most cases, could imply savings in borrowing costs for all the countries involved.The possibility of a common European bond has attracted the interest of the financial press and is receiving increased attention from policy makers 1 . There are potential wider benefits for the Eurozone as well as specific benefits for market agents such as issuers, dealers, and investors. A large common bond issue could have benefits even for countries with low credit risk (Germany, France), as it could rival American's treasuries market for liquidity. Moreover a single issuer would make EMU bonds more attractive to investors in large foreign-exchange reserves (China, Japan) and enhance the euro's standing as a reserve currency, as well as lowering borrowing costs for all countries that took part in it 2 .This common risk free rate can be used as a benchmark for measuring the benefits from financial market integration in the EMU. We conjecture and provide some evidence that our estimates of this rate would be close to what a common EMU-based single bond would yield for a specified maturity. We can then compare actual rates offered by the different EMU countries with sovereign bonds with this common rate. This allows us to compute the savings in terms of financing cost per year for the different EMU members.1 EPDA(2008EPDA( ,2009 2 Additional technical advantages such as minimizing the possibilities of "squeezes" are discussed in Pagano and Von Thadden (2004) 3Our results suggest that average savings in borrowing costs for all EMU countries are positive irrespective of the common risk free rate measure employed. Of course, there are many institutional design features that must be resolved (seniority, amount relative to total debt issues, guarantee fund, etc.) before such a common bond can be launched.But our paper provides a first insight into one central issue, namely, what should be the required compensation a given country X should pay to the actual issuer (le...

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Section: Unbalanced Panel Regressionsupporting

confidence: 72%

Section: Unbalanced Panel Regressionmentioning

confidence: 57%

Section: Related Literature On Emu Sovereign Bond Spreadsmentioning

confidence: 99%

Section: Theoretical Modelmentioning

confidence: 99%

See 2 more Smart Citations

Towards a Common European Monetary Union Risk Free Rate

Mayordomo¹,

Peña²

2009

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“…USD and CHF) have been negatively correlated with global stock markets. This quantitative finding may be explained by the phenomenon known in the literature as the flight to liquidity/quality, which has been confirmed by many studies (Beber, Brandt, & Kavajecz, 2009;Can Inci, Li, & McCarthy, 2011;Rosch & Kaserer, 2013). In periods of financial market turbulence, investors sell risky assets such as equities and reallocate their funds to the US treasuries or certain CHF-denominated debt instruments.…”

Section: Literature Reviewmentioning

confidence: 57%

Should pension funds hedge currency risk? The case of Poland

Kurach

Papla

2016

Baltic Journal of Economics

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In this study, we identify the optimal hedge ratio for mandatory pension funds, defining the optimum as the value that minimizes the portfolio variance in accordance with the social objective of the mandatory pension system. Unlike most previous studies, we apply a dynamic framework to account for a regular inflow of contributions and impose specific investment constraints that make the simulation more realistic. Our outcomes challenge the conventional knowledge concerning the need for currency hedging. We discover that in the case of Poland, shortening the currency positions is undesirable, as it amplifies the portfolio variance. Moreover, we provide evidence that pension funds should internationalize their portfolios even further to fully exploit the available diversification gains. Finally, the obtained simulation results are matched with real data. The comparison presented tends to beg the question of how to overcome the home bias phenomenon. ARTICLE HISTORY

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Euro Area Sovereign Risk During the Crisis

Zoli¹,

Sgherri²

2011

Sovereign Debt

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This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? In line with previous studies, the paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors' frailty and future debt dynamics. The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads. JEL Classification Numbers: E43, E62, G12.

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Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market

Cited by 651 publications

References 30 publications

Towards a Common European Monetary Union Risk Free Rate

Towards a Common European Monetary Union Risk Free Rate

Should pension funds hedge currency risk? The case of Poland

Euro Area Sovereign Risk During the Crisis

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