The Equity-like Behaviour of Sovereign Bonds

Alfonso Dufour, Andrei Stancu and Simone Varotto ()

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: Using a rich dataset of high frequency historical information we study the determinants of European sovereign bond returns over calm and crisis periods. We find that the importance of the equity risk factor varies greatly over time and crucially depends on country risk. In low risk countries, government bond returns are negatively related to equity returns, regardless of market conditions. Investors appear to migrate from low risk government bonds to stocks in calm periods and in the opposite direction when markets are under stress. On the other hand, government bonds of high risk countries lose their 'safe-asset' status and exhibit more equity- like behaviour during the sovereign debt crisis, with positive and strongly significant co- movements relative to the stock market. Interestingly, this segmentation of the government bond market results in higher diversification benefits for fixed income investors and pension funds in periods of sovereign stress.

Keywords: government bonds; subprime crisis; sovereign debt crisis; credit risk; liquidity risk; asset pricing (search for similar items in EconPapers)
JEL-codes: E43 G01 G12 G15 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-ban, nep-eec and nep-fmk
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Related works:
Journal Article: The equity-like behaviour of sovereign bonds (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2014-16

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