Resource title

Benchmark yield undershooting in the E.M.U.

Resource image

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Resource description

With the elimination of foreign exchange risk among the E.M.U.-member countries, the yield of, say, French benchmark government bonds (henceforth, the yield) should be equal to that of German bonds, plus some credit and liquidity premia. Since both premia are not likely to change substantially from one day to the other, the yield should move in tandem with the German one and the corresponding spread should remain relatively stable. Yet, the yield exhibits a small but economically and statistically significant undershooting in response to changes in the German one, as a result of which the spread tends to decline when the latter increases, and vice-versa. We propose that the undershooting is the product of lagged adjustment in the European bond portfolios that is driven by liquidity considerations and, in particular, by the possibility of excessive bond-price movements in response to changes in the German yield. The empirical results are consistent with this proposition and additionally suggest that the adjustment can last for as long as four days.

Resource author

Angelos A. Antzoulatos

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/19352

Resource license

Adapt according to the presented license agreement and reference the original author.