Title: Expectations and term premia in EFSF bond yields
Download PDF: Working Paper 54
This paper offers the first study of the term structure of EFSF bond yields and a decomposition into expected interest rates and term premia.
Authors: Andrea Carriero (Queen Mary University of London, University of Bologna), Lorenzo Ricci (ESM), and Elisabetta Vangelista (ESM).
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
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Term structure, volatility, density forecasting, no arbitrage.
JEL codes: C32, C53, E43, E47, G12