Liquidity and Credit Risk Premia in Government Bond Yields

42 Pages Posted: 9 Jul 2012

See all articles by Jacob Ejsing

Jacob Ejsing

European Central Bank (ECB)

Magdalena Grothe

European Central Bank (ECB)

Oliver Grothe

KIT

Date Written: May 24, 2012

Abstract

This paper quantifies liquidity and credit premia in German and French government bond yields. For this purpose, we estimate term structures of government-guaranteed agency bonds and exploit the fact that any difference in their yields vis-`a-vis government bonds can be attributed to differences in liquidity premia. Adding the information on risk-free rates, we obtain model-free and model-based gauges of sovereign credit premia, which are an important alternative to the information based on CDS markets. The results allow us to quantify the price impact of so-called “safe haven flows”, which strongly affected bond markets in late 2008/early 2009 and again during some phases of the sovereign debt crisis. Thus, we show to what extent these effects disguised the increase of sovereign credit premia in the government yields of core euro area countries.

Keywords: Liquidity premium, sovereign credit risk, yield curve modeling, bond markets, state space models

JEL Classification: E44, G12, G01

Suggested Citation

Ejsing, Jacob and Grothe, Magdalena and Grothe, Oliver, Liquidity and Credit Risk Premia in Government Bond Yields (May 24, 2012). ECB Working Paper No. 1440, Available at SSRN: https://ssrn.com/abstract=2065975 or http://dx.doi.org/10.2139/ssrn.2065975

Jacob Ejsing (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
00496913445312 (Phone)

Magdalena Grothe

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Oliver Grothe

KIT ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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