Limits to Arbitrage: Empirical Evidence from Euro Area Sovereign Bond Markets

43 Pages Posted: 10 Apr 2013 Last revised: 16 Jul 2014

Date Written: July 15, 2014

Abstract

We document that the yield-to-maturity of an USD-denominated bond, once the foreign exchange rate risk is hedged, could be higher by more than 150 basis points than a comparable EUR-denominated bond issued by the same Euro area country between 2008-2013. Using panel and matching techniques, we find that the pricing anomaly (i) is due to the lower haircuts applied to EUR-denominated bonds for the European Central Bank (ECB) liquidity operations; (ii) is strongly positively related to the amount of EUR-denominated bonds pledged in exchange for liquidity when the credit spreads of the sovereign issuer reach extreme levels; (iii) is strongly positively related to the amount of EUR-denominated sovereign bonds pledged in exchange for liquidity with a 3-year horizon; and (iv) widens during the ECB purchases of EUR-denominated bonds.

Keywords: Limits to Arbitrage, Market Anomalies, Central Banks Interventions

JEL Classification: G01, G12

Suggested Citation

Corradin, Stefano and Rodriguez-Moreno, Maria, Limits to Arbitrage: Empirical Evidence from Euro Area Sovereign Bond Markets (July 15, 2014). Available at SSRN: https://ssrn.com/abstract=2247312 or http://dx.doi.org/10.2139/ssrn.2247312

Stefano Corradin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Maria Rodriguez-Moreno (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
333
Abstract Views
1,959
Rank
172,386
PlumX Metrics