How does liquidity affect government bond yields?


Favero, Carlo ; Pagano, Marco ; Thadden, Ernst-Ludwig von



URL: http://www.csef.it/WP/wp181.pdf
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: Working Paper / Centre for Studies in Economics and Finance
Volume: 181
Place of publication: Fisciano
Publishing house: CSEF
Publication language: English
Institution: School of Law and Economics > VWL, Mikroökonomische Theorie (von Thadden)
Subject: 330 Economics
Abstract: The paper explores the determinants of yield differentials between sovereign bonds, using Euro area data. There is a common trend in yield differentials, which is correlated with a measure of aggregate risk. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We propose a simple model with endogenous liquidity demand, where a bond's liquidity premium depends both on its transaction cost and on investment opportunities. The model predicts that yield differentials should increase in both liquidity and risk, with an interaction term of the opposite sign. Testing these predictions on daily data, we find that the aggregate risk factor is consistently priced, liquidity differentials are priced for a subset of countries, and their interaction with the risk factor is in line with the model's prediction and crucial to detect their effect.

Dieser Eintrag ist Teil der Universitätsbibliographie.




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Favero, Carlo ; Pagano, Marco ; Thadden, Ernst-Ludwig von (2007) How does liquidity affect government bond yields? Working Paper / Centre for Studies in Economics and Finance Fisciano 181 [Working paper]


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