Risk aversion and Uncertainty in European Sovereign Bond Markets

V. Fourel and Julien Idier

Working papers from Banque de France

Abstract: Risk aversion and uncertainty are often both at play in market price determination, but it is empirically challenging to disentangle one from the other. In this paper we set up a theoretical model particularly suited for opaque over-the-counter markets that is shown to be empirically tractable. Based on high frequency data, we thus propose an evaluation of risk aversion and uncertainty inherent to the government bond markets in the euro area between 2007 and 2011. We particularly examine the impact of the European Central Bank Securities Markets Programme [SMP] implemented in May 2010 and re- activated in August 2011 to ease the pressure on the European sovereign bond markets. We show how this programme has killed market uncertainty but raised risk aversion for all countries except Greece in a risk-pooling mechanism: this can therefore weaken the impact of market interventions over the long-term.

Keywords: MES; systemic risk; tail correlation; balance sheet ratios; panel. (search for similar items in EconPapers)
JEL-codes: D40 D81 E58 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2011
New Economics Papers: this item is included in nep-eec, nep-fmk and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:349

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