Details
| Original language | English |
|---|---|
| Pages (from-to) | 407-426 |
| Number of pages | 20 |
| Journal | Annals of Operations Research |
| Volume | 282 |
| Issue number | 1-2 |
| Early online date | 9 Aug 2019 |
| Publication status | Published - Nov 2019 |
Abstract
Liquidity risk is the risk that an asset cannot always be sold without causing a fall in its price because of a lack of demand for this asset. Many empirical studies examining liquidity premia have focused on government bonds. In this paper, we specifically investigate the yield differentials between liquid and illiquid German covered bonds by considering the yields of traditional Pfandbrief bonds and Jumbo Pfandbrief bonds with different maturities. In terms of credit risk the spread between the yields of these two types of covered bonds should be zero. Moreover, assuming that the liquidity risk premium is a stationary variable the yields of Pfandbrief bonds and Jumbo Pfandbrief bonds (which seem to be integrated of order one) should be cointegrated. We make use of the methodology proposed in the related field of fractional integrated models to conduct our empirical analysis. Due to the 2008–2009 global financial crisis, it also seems to be appropriate to consider structural change. To the extent that the European Central Bank has started to purchase covered bonds under the crisis pressure, our empirical evidence would have a high relevance for monetary policymakers as far as the liquidity risk is concerned. Here, our results indicate fractionally cointegrated yields before and after the crisis, while the degree of integration of the spread increases strongly during the crisis.
Keywords
- Covered bonds, Fractional cointegration, Liquidity risk
ASJC Scopus subject areas
- Decision Sciences(all)
- General Decision Sciences
- Decision Sciences(all)
- Management Science and Operations Research
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In: Annals of Operations Research, Vol. 282, No. 1-2, 11.2019, p. 407-426.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Liquidity risk and the covered bond market in times of crisis
T2 - empirical evidence from Germany
AU - Wegener, Christoph
AU - Basse, Tobias
AU - Sibbertsen, Philipp
AU - Nguyen, Duc Khuong
N1 - Funding information: We would like to thank the participants of the Paris Financial Management Conference 2016 and the participants of the Annual International Conference on Macroeconomic Analysis and International Finance 2017 for insightful discussions. Furthermore, we would like to thank the editor and two anonymous referees for helpfull comments and suggestions.
PY - 2019/11
Y1 - 2019/11
N2 - Liquidity risk is the risk that an asset cannot always be sold without causing a fall in its price because of a lack of demand for this asset. Many empirical studies examining liquidity premia have focused on government bonds. In this paper, we specifically investigate the yield differentials between liquid and illiquid German covered bonds by considering the yields of traditional Pfandbrief bonds and Jumbo Pfandbrief bonds with different maturities. In terms of credit risk the spread between the yields of these two types of covered bonds should be zero. Moreover, assuming that the liquidity risk premium is a stationary variable the yields of Pfandbrief bonds and Jumbo Pfandbrief bonds (which seem to be integrated of order one) should be cointegrated. We make use of the methodology proposed in the related field of fractional integrated models to conduct our empirical analysis. Due to the 2008–2009 global financial crisis, it also seems to be appropriate to consider structural change. To the extent that the European Central Bank has started to purchase covered bonds under the crisis pressure, our empirical evidence would have a high relevance for monetary policymakers as far as the liquidity risk is concerned. Here, our results indicate fractionally cointegrated yields before and after the crisis, while the degree of integration of the spread increases strongly during the crisis.
AB - Liquidity risk is the risk that an asset cannot always be sold without causing a fall in its price because of a lack of demand for this asset. Many empirical studies examining liquidity premia have focused on government bonds. In this paper, we specifically investigate the yield differentials between liquid and illiquid German covered bonds by considering the yields of traditional Pfandbrief bonds and Jumbo Pfandbrief bonds with different maturities. In terms of credit risk the spread between the yields of these two types of covered bonds should be zero. Moreover, assuming that the liquidity risk premium is a stationary variable the yields of Pfandbrief bonds and Jumbo Pfandbrief bonds (which seem to be integrated of order one) should be cointegrated. We make use of the methodology proposed in the related field of fractional integrated models to conduct our empirical analysis. Due to the 2008–2009 global financial crisis, it also seems to be appropriate to consider structural change. To the extent that the European Central Bank has started to purchase covered bonds under the crisis pressure, our empirical evidence would have a high relevance for monetary policymakers as far as the liquidity risk is concerned. Here, our results indicate fractionally cointegrated yields before and after the crisis, while the degree of integration of the spread increases strongly during the crisis.
KW - Covered bonds
KW - Fractional cointegration
KW - Liquidity risk
UR - http://www.scopus.com/inward/record.url?scp=85070454996&partnerID=8YFLogxK
U2 - 10.1007/s10479-019-03326-8
DO - 10.1007/s10479-019-03326-8
M3 - Article
AN - SCOPUS:85070454996
VL - 282
SP - 407
EP - 426
JO - Annals of Operations Research
JF - Annals of Operations Research
SN - 0254-5330
IS - 1-2
ER -