Expectations and term premia in EFSF bond yields

Andrea Carriero, Lorenzo Ricci and Elisabetta Vangelista
Additional contact information
Elisabetta Vangelista: ESM

Working Papers from European Stability Mechanism

Abstract: The European Financial Stability Facility (EFSF) was set up in June 2010 as a temporary crisis resolution mechanism. In October 2012, its tasks were taken over by European Stability Mechanism (ESM), a permanent institution with a capital-based structure. Liquidity conditions for EFSF bonds in the secondary market are different from those of large sovereign bond issuers, which affects bond pricing. This paper offers the first study of the term structure of EFSF bond yields and a decomposition into expected interest rates and risk premia, based on a state-of-the-art no-arbitrage term structure model. A joint model of the EFSF curve and the swap curve allows to further identify the liquidity and credit components of both yield curves and disentangle an additional element of liquidity typical of bonds. This component is closely related to the ECB monetary policy. This model can be extended to other supranational institutions.

Keywords: Term structure; volatility; density forecasting; no arbitrage (search for similar items in EconPapers)
JEL-codes: C32 C53 E43 E47 G12 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2022-07-29
New Economics Papers: this item is included in nep-cba, nep-eec and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published

Downloads: (external link)
https://www.esm.europa.eu/system/files/document/2022-07/ESM_WP_54.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:54

Access Statistics for this paper

More papers in Working Papers from European Stability Mechanism Contact information at EDIRC.
Bibliographic data for series maintained by Karol SISKIND ().