The Fundamentals of Safe Assets

42 Pages Posted: 8 Jan 2020

See all articles by Maurizio Michael Habib

Maurizio Michael Habib

European Central Bank (ECB)

Livio Stracca

European Central Bank (ECB)

Fabrizio Venditti

European Central Bank (ECB)

Date Written: January, 2020

Abstract

We study what makes government bonds a safe asset. Building on a sample of monthly changes in government bond yields in 40 advanced and emerging countries, we analyse the sensitivity of yields to country specific fundamentals interacted with changes in global risk (VIX). We find that inertia (whether the bond behaved as a safe asset in the past) and good institutions foster a safe asset status, while the size of the debt market is also significant, reflecting the special role of the US. Within advanced and emerging markets, drivers are heterogeneous, with external sustainability in particular being relevant for the latter countries after the global financial crisis. Finally, the safe asset status does not appear to depend on whether the change in global risk is driven by financial shocks rather than by US monetary policy.

Keywords: fundamentals, global risk, monetary policy, safe assets

JEL Classification: E42, E52, F31, F36, F41

Suggested Citation

Habib, Maurizio Michael and Stracca, Livio and Venditti, Fabrizio, The Fundamentals of Safe Assets (January, 2020). ECB Working Paper No. 2355, Available at SSRN: https://ssrn.com/abstract=3515302

Maurizio Michael Habib (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Fabrizio Venditti

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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