Collateral Haircuts and Bond Yields in the European Government Bond Markets

Abstract

Analyzing a novel collateral haircut dataset, this paper investigates the relations between the collateral haircuts and the yields of Euro-area central government bonds. The empirical analysis shows that investors demand higher yields for bonds with higher collateral haircuts. The importance of collateral haircuts on bond yields remains robust after controlling for the variations in credit quality, market liquidity and the effects of the European sovereign debt crisis.

Keywords: Liquidity, Funding Constraints, Asset Pricing, European Government Bond Markets, Central Bank Monetary Policies

JEL Classification: G10, G12, G15, G18