How does liquidity affect government bond yields?


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



DOI: https://doi.org/10.2139/ssrn.1284646
URL: https://ssrn.com/abstract=1284646
Additional URL: https://ssrn.com/abstract=1140578
Document Type: Working paper
Year of publication: 2008
The title of a journal, publication series: CEPR Discussion Paper
Volume: 6649
Place of publication: London
Publishing house: Centre for Economic Policy Research (CEPR)
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.




+ Citation Example and Export

Favero, Carlo ; Pagano, Marco ; Thadden, Ernst-Ludwig von (2008) How does liquidity affect government bond yields? CEPR Discussion Paper London 6649 [Working paper]


+ Search Authors in

+ Page Views

Hits per month over past year

Detailed information



You have found an error? Please let us know about your desired correction here: E-Mail


Actions (login required)

Show item Show item