What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality

Mauro Costantini and Ricardo Sousa

Journal of International Money and Finance, 2022, vol. 122, issue C

Abstract: We use a panel of 10 euro area countries over the period 1996Q1-2017Q4 to show that heightened uncertainty leads to (i) a flight to “safety” and (ii) a flight to “quality” in sovereign bond markets. Global, macroeconomic and the common euro area uncertainty outperform country-level, financial and euro area idiosyncratic uncertainty in forecasting sovereign bond risk premia, respectively. A rise in economic policy uncertainty also pushes investors to demand a disproportionately larger premium to hold “risky” bonds versus the “safe-haven” bond. Finally, business and economic related uncertainty is of first-order importance, while politics and government uncertainty plays a somewhat secondary role. Our results are robust to yield curve inversions, risk rating metrics, (non-standard) monetary policy conditions and the occurrence of sovereign debt crises.

Keywords: Sovereign bonds; Uncertainty; Flight to safety; Flight to quality; Euro area; Panel data (search for similar items in EconPapers)
JEL-codes: C33 D12 E21 E44 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560621002254
Full text for ScienceDirect subscribers only

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:eee:jimfin:v:122:y:2022:i:c:s0261560621002254

DOI: 10.1016/j.jimonfin.2021.102574

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().