Much Ado About Nothing: A Study of Differential Pricing and Liquidity of Short and Long Term Bonds

63 Pages Posted: 11 Dec 2018 Last revised: 16 Apr 2019

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Theo Nijman

Tilburg University - Tilburg University School of Economics and Management

Zorka Simon

Leibniz Institute for Financial Research SAFE

Date Written: December 2018

Abstract

Are yields of long-maturity bonds distorted by demand pressure of clientele investors, regulatory effects, or default, flight-to-safety or liquidity premiums? Using data on German nominal bonds between 2005 and 2015, we study the differential pricing and liquidity of short and long maturity bonds. We find statistically significant, but economically negligible segmentation in yields and some degree of liquidity segmentation of short-term versus long-term bonds. These results have important policy implications for the €17.5 trillion European pension and insurance industries: long maturity bond yields seem appropriate for the valuation of long-term liabilities.

Keywords: Sovereign Bonds, Term Structure of Interest Rates, Segmentation, Liquidity, Flight-to-safety, Credit Risk, Unconventional Monetary Policy

JEL Classification: G01, G12, G15, G18

Suggested Citation

Driessen, Joost and Nijman, Theo E. and Simon, Zorka, Much Ado About Nothing: A Study of Differential Pricing and Liquidity of Short and Long Term Bonds (December 2018). SAFE Working Paper No. 238, Available at SSRN: https://ssrn.com/abstract=3296959 or http://dx.doi.org/10.2139/ssrn.3296959

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Theo E. Nijman

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

Zorka Simon (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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