How effective are sovereign bond-backed securities as a spillover prevention device?

David Cronin and Peter Dunne

No 66, ESRB Working Paper Series from European Systemic Risk Board

Abstract: Brunnermeier et al. (2017) propose the introduction of sovereign bond-backed securities (SBBS) in the euro area. It and other papers address how the securitisation would insulate senior security holders from actual default-related losses. This article generalises the assessment by using the VAR-based Diebold & Yilmaz (2012) spillover index methodology to assess potential attenuation of the spillover of shocks in holding-period returns across asset markets from the introduction of SBBS. This is made possible by employing SBBS yields estimated from historical euro area member state sovereign bond yields using Monte Carlo methods, as described in Schönbucher (2003). The econometric results show that (i) SBBS tranching protects senior SBBS holders by reducing the spillover of shocks from the higher-risk peripheral member states to it; (ii) spillovers from high risk sovereigns to a weighted portfolio are much higher than those to the senior SBBS; (iii) a smaller junior SBBS tranche, and the introduction of a mezzanine security, reduces spillover from it to the senior SBBS; and (iv) rolling window analysis indicates that the spillover of shocks from the junior tranche to the senior tranche declines during a period of financial stress. JEL Classification: C58, G11, G12, G17

Keywords: bond securitisation; safe assets; sovereign risk contagion (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-eec
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Related works:
Journal Article: How effective are sovereign bond-backed securities as a spillover prevention device? (2019)
Working Paper: How Effective are Sovereign Bond-Backed Securities as a Spillover Prevention Device (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201866

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