Sovereign Credit Quality and Violations of the Law of One Price

35 Pages Posted: 23 Aug 2016 Last revised: 4 Nov 2019

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Jordan Brooks

AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Zhikai Xu

AQR Capital Management, LLC

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2016

Abstract

It is well-documented that government bonds with almost identical cash flows can trade at different prices. This paper analyzes the cross-section of bond spreads across developed European countries and documents a novel result. In periods of widening credit spreads, bond spreads between new and old issues tighten for low quality sovereigns. In other words, the newer bonds become cheaper, not more expensive, relative to their older counterparts. We offer an explanation based on price pressure and provide empirical support using data on net flows of investors in sovereign bonds.

Keywords: Liquidity, International Bond Pricing, Financial Crisis, Euro Crisis, Arbitrage

JEL Classification: F30, G12, G15, G01

Suggested Citation

Boudoukh, Jacob and Brooks, Jordan and Richardson, Matthew P. and Xu, Zhikai, Sovereign Credit Quality and Violations of the Law of One Price (April 3, 2016). Available at SSRN: https://ssrn.com/abstract=2827065 or http://dx.doi.org/10.2139/ssrn.2827065

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Jordan Brooks

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Zhikai Xu

AQR Capital Management, LLC

Greenwich, CT
United States

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