An Analysis of Default and Liquidity Risk in Farm Credit System Bonds

Farrell E. Jensen and Christoffer K. Perry

Journal of Agricultural and Resource Economics, 2007, vol. 32, issue 01

Abstract: This study tests for the existence of default and liquidity risk premiums in Farm Credit System bonds. ARCH models are used with over eight years of daily data on yields to maturity of Farm Credit System bonds and U.S. Treasury bonds. Matching five-year maturities for both types of bonds were used. Out data contain evidence of both default and liquidity risk in the spread between the two securities. Elasticity estimates show that the yield spreads are more responsive to default risk than liquidity risk. These sources of risk likely increase the rates agricultural borrowers must pay for loans from the Farm Credit System.

Keywords: ARCH model; default risk; Farm Credit System bonds; liquidity risk; yield spreads; Agricultural Finance (search for similar items in EconPapers)
Date: 2007
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