Liquidity and credit premia in the yields of highly-rated sovereign bonds |
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| Affiliation: | 1. Danmarks Nationalbank, Government Debt Management, Havnegade 5, DK-1093 Copenhagen, Denmark;2. European Central Bank, Directorate General Economics, Capital Markets and Financial Structure Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany;3. Karlsruhe Institute of Technology, Institute of Operations Research, Schlossbezirk 14, 76131 Karlsruhe, Germany;1. Department of Mathematics, Southeast University, Nanjing 210096, PR China;2. School of Mathematical Sciences, Kaili University, Kaili 556011, PR China;1. Departament d’Econometria, Estadística i Economia Aplicada, Universitat de Barcelona (UB), Spain;2. School of Finance, Economics and Government, Universidad EAFIT, Medellín, Colombia;3. Faculty of Economics and Business, Universitat Oberta de Catalunya, Spain |
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| Abstract: | This paper quantifies liquidity and credit premia in German and French government bond yields. For this purpose, we estimate term structures of government-guaranteed agency bonds and exploit the fact that differences in their yields vis-à-vis government bonds are mainly driven by liquidity effects. Adding information on benchmark rates, we estimate liquidity and credit premia as latent factors in a state-space framework. The results allow us, first, to quantify the price impact of safe-haven flows on sovereign yields, which strongly affected very liquid bond markets during the recent financial crisis. Second, we quantify credit premia for highly rated governments, offering an important alternative to the information based on CDS markets. |
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