Collateral Affects Return Risk: Evidence From the Euro Bond Market

45 Pages Posted: 28 May 2019

See all articles by Stig Helberg

Stig Helberg

Norwegian University of Science and Technology (NTNU)

Snorre Lindset

Norwegian University of Science and Technology (NTNU)

Date Written: April 29, 2019

Abstract

Covered bonds and senior bonds are important securities for fixed income investors. Senior bonds are unsecured, while covered bonds are secured and backed by collateral. Our results show that collateral reduces the total risk in individual bonds by more than 70%. Compared to diversified portfolios of senior bonds, diversified portfolios of covered bonds have a significantly lower level of systematic risk. However, the fraction of systematic risk to total risk is higher for covered bonds. By decomposing the variance of bond returns, we find that around 33% of the risk in senior bonds is systematic, versus 53% in covered bonds. Both types of bonds contain instrument specific risk.

Keywords: Collateral, systematic risk, unsystematic risk, instrument-specific risk

JEL Classification: G10, G12, G32

Suggested Citation

Helberg, Stig and Lindset, Snorre, Collateral Affects Return Risk: Evidence From the Euro Bond Market (April 29, 2019). Available at SSRN: https://ssrn.com/abstract=3379557 or http://dx.doi.org/10.2139/ssrn.3379557

Stig Helberg

Norwegian University of Science and Technology (NTNU) ( email )

Høgskoleringen
Trondheim NO-7491, 7491
Norway

Snorre Lindset (Contact Author)

Norwegian University of Science and Technology (NTNU) ( email )

Høgskoleringen
Trondheim NO-7491, 7491
Norway
+4773591395 (Phone)

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