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Using a dataset of bank‐ and regional‐level data, we study the effectiveness and heterogeneity of the transmission mechanism of the ECB's large scale asset purchases (LSAPs) to the real economy. Our results indicate that banks more exposed to government debt securities had higher growth of loans and loans relative to total assets than less exposed banks after the asset purchase programme (APP), but not after the pandemic emergency purchase programme (PEPP). Furthermore, our results demonstrate that regions where banks are more exposed to government securities exhibit more favorable outcomes after the APP in GDP, fixed capital formation, unemployment, and compensation of employees than regions with less exposed banks, via the bank lending channel. We argue that banks' exposure to LSAPs targeted assets and their geographical location is an important factor determining the magnitude and heterogeneity of the portfolio rebalancing transmission mechanism to the real economy. [ABSTRACT FROM AUTHOR]

During the Eurozone's sovereign debt crisis, the ideational consensus that shaped the foundation of Economic and Monetary Union (EMU) was destabilized by disagreement on unconventional monetary policies (UMPs), specifically government bond purchases. In the ECB's 2021 strategy review, however, UMPs were confirmed as standard elements of the European Central Bank's (ECB) toolbox. What happened? One argument frequently presented to question the legitimacy of UMPs is that they undermine the prior objective of the EMU of avoiding moral hazard. We analyse the politics of UMPs by focusing upon how top officials in four major Eurozone central banks have discursively constructed the relationship between the ECB's purchase of sovereign debt and moral hazard. We find that top central bank officials aligned to a large degree on the non‐necessary causal relationship between government bond purchases and moral hazard, which reinforced its legitimacy and eventual acceptance as 'conventional'. [ABSTRACT FROM AUTHOR]

In the US Treasury bond market, the existence of a bond pair (two bonds with the same maturity but different coupons) is shown to allow the computation of the zero‐coupon interest rate for that maturity directly from the bond prices, as well as the zero‐coupon interest rates for adjacent maturity bonds with the same number of coupon payments. Since the 2008–2009 financial crisis, the number of bond pairs has increased, allowing for the direct estimation from bond prices of the zero‐coupon interest rates for an average of 180 individual maturities for bond maturities between 6 months and 30 years. The bond pairs approach outperforms popular yield‐curve‐fitting models in accurately reproducing original bond prices. [ABSTRACT FROM AUTHOR]

We investigate corporate bond returns for the period 1838–1939 by compiling a unique new database of 201 000 monthly observations of bonds traded on the Brussels Stock Exchange. The value‐weighted annualized total rate of return, net of coupon defaults and taxes, is 4.35 per cent in nominal terms and 2.81 per cent in real terms. Estimates of average returns show that corporate bonds outperformed equities during the entire nineteenth century. We find that the risk‐adjusted performance of corporate bonds based on Sharpe ratios exceeds that of equities and sovereign bonds during the corporate bond market's first centennial. [ABSTRACT FROM AUTHOR]

We consider whether government bonds, through the term structure, or corporate bonds, through the default yield, provide predictive power for output, consumption and investment growth in the United States. Such predictive power will allow policy‐makers to use the information as a leading indicator for macroeconomic performance and will improve our understanding of the links between real and financial markets. Full sample results suggest that both interest rate series exhibit predictive power for each of the macroeconomic growth series. Time‐variation in the predictive coefficient reveals the waning influence of the term structure and the rising influence of the default yield. Forecast results, which are obtained from a rolling window approach, likewise suggest both series have information content for macroeconomic conditions, but there is a change in their relative strengths. These results may arise as interest rates have declined since the highs of the early to mid‐1980s thus reducing the information content of government yields, whereas corporate bonds respond more to investor views of macroeconomic risk, which affects a firm's ability to repay its debt. Furthermore, short‐term rates are largely held unprecedently low since the dotcom crash. [ABSTRACT FROM AUTHOR]

This paper examines nonlinear and time‐varying dependence structures between a pair of stochastic variables, using a novel approach which combines regime‐switching models and local Gaussian correlation (LGC). We propose an LGC‐based bootstrap test for examining whether the dependence structure between two variables is equal across different regimes. We examine this test in a Monte Carlo study, where it shows good level and power properties. We argue that this approach is more intuitive than competing approaches, typically combining regime‐switching models with copula theory. Furthermore, LGC is a semi‐parametric approach, hence avoids any parametric specification of the dependence structure. We illustrate our approach using financial returns from the US–UK stock markets and the US stock and government bond markets, and provide detailed insight into their dependence structures. [ABSTRACT FROM AUTHOR]

If sovereign immunity waivers and clauses calling for litigation abroad reduce the risk of expropriation, bonds governed by foreign law should, ceteris paribus, trade at a premium compared to bonds issued under domestic law. In 2020, Argentina exchanged a panoply of bonds with different currencies, maturity and coupon structure for pairs of bonds that are identical except for their governing law. We leverage these "twin" bonds to identify the effect of legal jurisdiction on sovereign debt prices. Our findings indicate that foreign‐law bonds consistently trade at higher prices and are primarily held by long‐term investors. These results suggest that market participants price certain legal terms (e.g., governing law) in sovereign debt, and investors expect to face less credit risk under bonds governed by foreign law, either due to a lower risk of selective default or higher recovery rate in foreign courts. [ABSTRACT FROM AUTHOR]

Based on daily data from 2013 to 2022, this study examines the spillover effects of volatility between cloud stocks and other asset classes (global stocks, treasury bonds, gold and crude oil) using the VAR connectedness approach. The results show that there is a significant spillover effect from global stocks and crude oil markets to the cloud stock market. The spillover effects become stronger whenever there are shocks such as economic crisis, turbulence in the international financial markets, COVID‐19 and global inflation. However, nearly 91% of the variations of cloud stocks come from within, suggesting that the diversification/hedging value of cloud stocks is potentially high. [ABSTRACT FROM AUTHOR]

To improve the dynamic assessment of risks of speculative assets, we apply a Markov switching MGARCH approach to portfolio risk forecasting. More specifically, we take advantage of the flexible Markov switching copula multivariate GARCH (MS‐C‐MGARCH) model of Fülle and Herwartz (2022). As an empirical illustration, we take the perspective of a risk‐averse agent and employ the suggested model for assessments of future risks of portfolios composed of a high‐yield equity index (S&P 500) and two safe‐haven investment instruments (i.e., Gold and US Treasury Bond Futures). We follow recent suggestions to employ the expected shortfall as a prime assessment of tail risks. To accurately evaluate the merits of the new model, we back‐test the risk forecasting for daily returns over 10 years for heterogeneous market environments including, for example, the COVID‐19 pandemic. We find that the MS‐C‐MGARCH model outperforms benchmark volatility models (MGARCH, C‐MGARCH) in predicting both value‐at‐risk and expected shortfall. The superiority of the MS‐C‐MGARCH model becomes stronger, when the share of comparably risky assets in the portfolio is relatively large. [ABSTRACT FROM AUTHOR]

The relationship between air temperature and sovereign bond returns is founded on competing paradigms: macroeconomic, behavioral and energy demand‐based. Which of these theoretical mechanisms receives support from data? To answer this, we examined four decades of bond data from 31 countries. Overall, daily temperature positively affects government bond returns. A 10°F rise leads to an increase in sovereign bond returns between 0.22 and 0.85 basis points. We also document evidence of asymmetric and nonlinear price responses to both temperature levels and shocks. Our results survive a battery of robustness checks and lend support to the macroeconomic and behavioral paradigms, albeit not the energy demand‐based view. [ABSTRACT FROM AUTHOR]

In the context of the COVID‐19's outbreak and its implications for the financial sector, this study analyses the aspect of hedging and safe‐haven under the pandemic. Drawing on the daily data from 02 August 2019 to 17 April 2020, our key findings suggest that the contagious effects in financial assets' returns significantly increased under COVID‐19, indicating exacerbated market risk. The connectedness spiked in the middle of March, consistent with lockdown timings in major economies. The effect became severe with the WHO's declaration of a pandemic, confirming negative news effects. The return connectedness suggests that COVID‐19 has been a catalyst of contagious effects on the financial markets. The crude oil and the government bonds are however not as much affected by the spillovers as their endogenous innovation. In terms of spillovers, we do find the safe‐haven function of Gold and Bitcoin. Comparatively, the safe‐haven effectiveness of Bitcoin is unstable over the pandemic. Whereas, GOLD is the most promising hedge and safe‐haven asset, as it remains robust during the current crisis of COVID‐19 and thus exhibits superiority over Bitcoin and Tether. Our findings are useful for investors, portfolio managers and policymakers interested in spillovers and safe havens during the current pandemic. [ABSTRACT FROM AUTHOR]

We explore whether voters' willingness to approve government spending in bond elections is affected by how costs are presented. Using an original survey experiment, we examine willingness to approve bonds, randomizing both the total cost of the bond and the framing of the cost as either a personal cost or an aggregate amount. We find that respondents are less supportive of bonds when the bond is framed as a personal expense and that respondents are more cost‐responsive when they see personal costs. There is also substantial heterogeneity based on the respondent's partisanship and the policy domain of the bond. Key Takeaways: States and local governments are often constitutionally required to ask voters in elections for permission to issue debt in the form of government bonds. These bond questions appear on the ballot and must be presented to voters for approval. Some jurisdictions have laws about how bond amounts must appear on the ballot. For example, some require individual cost translations, others require individual cost translations to be part of a voter information packet, and in others, no cost translation is required nor is it standard practice. Many jurisdictions simply have a choice about how they present bond amounts and their impact to voters in terms of presenting an aggregate bond amount or an individual cost expectation. Election planners also make choices about how to ask voters to approve bond amounts; they can ask voters to approve a smaller bond amount and go back to the voters each time more funds for the same issue are needed or ask the voters for a large amount that will fund that area of investment for many years. We investigate the impact of these choices—size of the bond and if it is presented as an aggregate or personal cost amount—on voter support.As the size of a bond increases, voter support decreases. However, the decrease in support for ballots using aggregate amounts is minimal.Voters who are given individual cost projections on a ballot are more cost‐responsive than voters who see aggregate bond amounts. This is particularly true for bond projects that are less popular.These findings indicate that requirements that jurisdictions share individual cost projections on the ballot, or decisions by election officials to do so, will have a greater impact on bond referenda for large amounts than for those with smaller amounts, and on projects that have lower baseline support. Taken holistically, the results support concerns about the ability of citizens to reasonably evaluate the spending they are required to approve through bond elections. [ABSTRACT FROM AUTHOR]

This article examines the political economy of fiscal dominance during the Chilean government (1970–73) of Salvador Allende. Fiscal dominance appears when the monetary authority complies with the fiscal authority's demand to buy treasury bonds and monetise the deficit. It is argued that persistent fiscal dominance is inflationary, especially without robust fiscal and monetary rules. The Allende government financed the deficit with present taxes, debt (future taxes) and monetary issuance (inflation tax), causing the crowding‐out effect and, together with other policies such as expropriation and price controls, collapsed the demand for money, triggering hyperinflation. The lessons of Chile clarify the fiscal trigger of the inflation, stagnation, and widespread poverty that has affected Latin American countries in recent decades. [ABSTRACT FROM AUTHOR]

This article presents a novel algorithm that accurately predicts market trends and identifies trading entry points for US 30‐year Treasury bonds. The proposed method employs a hybrid approach, integrating a 1‐dimensional convolutional neural network (1DCNN), long‐short term memory (LSTM), and XGBoost algorithms. The 1DCNN is used to learn local and short‐term patterns, while LSTM is employed to capture both short and long‐term dependencies. Furthermore, we have implemented an algorithm that utilizes hull moving average (HMA) and simple moving average (SMA) crossover data to detect trading entry points and major trends in the market. The combination of the SMA–HMA crossover algorithm and predictions provided by the 1DCNN‐BiLSTM‐XGBoost algorithm yields exceptional results in terms of prediction accuracy and profitability. Additionally, these integrated techniques effectively filter out noise and mitigate false breakouts, which are often observed with US 30‐year Treasury bonds. In the field of financial time series prediction, the effectiveness of 1DCNN and LSTM in identifying trading entry points and market perturbations has not been comprehensively studied. Therefore, our work fills this gap by demonstrating through experiments that the proposed 1DCNN‐BiLSTM‐XGBoost algorithm, in combination with moving average crossovers, effectively reduces noise and market perturbations. This leads to the precise identification of trading entry points and accurate recognition of trend signals for US 30‐year Treasury bonds. We demonstrate through experiments that our proposed approach achieves an average root mean squared error of 0.0001 and an R‐square value of 0.9999, highlighting its promise as a method for predicting market trends and trading entry points for US 30‐year Treasury bonds. [ABSTRACT FROM AUTHOR]

Understanding the transmission of volatility across markets is essential for managing risk and financial stability, especially under crisis periods during which an extreme event occurring in one market is easily transmitted to another market. To gain such an understanding and enrich the related literature, we examine in this article the system of volatility spillovers across various equity markets and asset classes using a quantile‐based approach, allowing us to capture spillovers under normal and high volatility states. The sample period is 16 March 2011–10 November 2020 and the employed dataset comprises 12 implied volatility indices representing a forward‐looking measure of uncertainty of global equities, strategic commodities and the US Treasury bond market. The results show that the identity of transmitters and receivers of volatility shocks differ between normal and high volatility states. The US stock market is at the centre of volatility spillovers in the normal volatility state. European and Chinese stock markets and strategic commodities (e.g. crude oil and gold) become major volatility transmitters in the high volatility state, after acting as volatility receivers during normal periods. Furthermore, we study the drivers of implied volatility spillovers using regression models and find that US Default spread contributes to the total volatility spillover index in both volatility states, whereas TED spread plays a significant role in the normal volatility state. As for the role of short rate and risk aversion, it is significant in the high volatility state. These findings matter to the decision‐making process of risk managers and policymakers. [ABSTRACT FROM AUTHOR]

The article delves into the challenges and risks encountered within the U.S. Treasury market, with a specific emphasis on liquidity concerns and the implications of regulatory measures, notably central clearing mandates. It scrutinizes recent events, such as the liquidity trap triggered by the COVID-19 crisis in March 2020, and analyzes the role of margin calls and collateralization mechanisms in exacerbating market volatility.

We document that the Treasury market investor sentiment (TSENT) of institutional investors is a powerful predictor of bond risk premia. Specifically, TSENT positively predicts Treasury bond excess returns in and out of sample. The forecasting gains of TSENT are incremental to those in conventional bond return predictors: Fama–Bliss forward spreads, Cochrane–Piazzesi forward rate factor, and Ludvigson–Ng macro factor, as well as equity market sentiment proxies such as the investor sentiment index and the partial least squares sentiment index. Asset allocation analysis indicates the forecasting power of TSENT is economically valuable to investors. Finally, we show that the time‐series bond risk premia predictability associated with TSENT relates to its predictive power for macroeconomic performance, such as payroll employment, unemployment rate, and industrial production. [ABSTRACT FROM AUTHOR]

This paper assesses the possible development of government interest expenditures for Germany, France, Italy and Spain. Until 2021, governments could anticipate a substantial further reduction in interest expenditure. This outlook has changed drastically with the surge in inflation and government bond rates. Assuming that bond rates remain at the levels implied by yield curves from December 2022, interest expenditure rises substantially. We also examined scenarios with a further upward shift in yield curves by one or two percentage points. They indicate major medium‐term risks for highly indebted member states with interest expenditure approaching or exceeding levels last observed on the eve of the euro area debt crisis. Governments should take action to achieve a decline in debt‐to‐GDP ratios towards safe levels. They need to make sure public debt remains sustainable at the higher interest rates that are required to achieve price stability in the euro area. [ABSTRACT FROM AUTHOR]

We study the impact of Greek government‐debt crisis events on inter‐relations of European financial markets during the European sovereign debt crisis. To this end, we examine the effects of three categories of Greek government‐debt crisis events in the realized correlations and correlation jumps of government bonds, CDS, and stock indices of seven European countries (i.e., France, Germany, Greece, Ireland, Italy, Portugal, and Spain) via the respective dummy variables and news surprises on 2‐year, 5‐year, and 10‐year government bonds and CDS in a non‐parametric framework by employing Tobit regression models. According to the results, the direction of most impacts on correlations and correlation jumps is negative, suggesting that the Greek government‐debt crisis events reduced the homogeneity among member states in the Eurozone. We also investigate the types of Greek government‐debt crisis events that have the highest impacts on correlations and correlation jumps and find that the highest impacts mainly result from news originating from Greek and European sources. [ABSTRACT FROM AUTHOR]

This article questions the validity of widely promulgated claims that Sri Lanka's debt crisis is the result of a combination of Chinese debt diplomacy and economic mismanagement in the form of fiscal and monetary excesses. The authors argue that if Sri Lanka has fallen into any kind of debt trap, it is an international sovereign bond debt trap. They further argue that the fundamental cause of the country's debt crisis is the failure of successive Sri Lankan administrations to transition towards an export‐oriented manufacturing economy focused on producing increasingly technologically sophisticated manufactured products, and lay the blame for this failure on a combination of external and domestic forces operating in tandem with one another. Since the remedial action taken by the Sri Lankan government in the context of an extended fund facility arrangement with the International Monetary Fund is premised on the contention that the source of the crisis is the protracted fiscal and monetary excesses of successive Sri Lankan administrations, this action is unlikely to offer a permanent solution to Sri Lanka's debt problem — just as similar attempts to remedy previous debt and currency crises have failed. [ABSTRACT FROM AUTHOR]

We examine the effect on government bond yields of three policy measures by the Reserve Bank of Australia implemented following the onset of the COVID‐19 pandemic. We also assess their impact on bond market functioning. The measures were purchases to support government bond market function over early 2020, the yield target on 3‐year Australian government bonds, and the bond purchase programme to lower longer‐term yields from late 2020 through early 2022. For purchases to support market function, we find that the announcement lowered short‐dated Australian Government Securities (AGS) yields but did not lower longer‐dated AGS yields. We also find that purchases led to lower yields as and when they were implemented and that they supported market function by lowering bid–offer spreads. For the yield target, we find a substantial announcement effect and moderate implementation effects on yields. Conversely, the yield target appears to have detrimentally affected some aspects of the bond market function. For the bond purchase programme, we find an announcement effect of approximately 30 basis points for longer‐term AGS yields; however, any implementation effects were small and temporary. [ABSTRACT FROM AUTHOR]

This study aims to incorporate the effects of recently used alternative monetary policies, such as quantitative easing into standard Taylor rule exchange rate models. Using out‐of‐sample forecasting, we determine whether including long‐term government bond yields and shadow interest rates improves on these model's performance. Using data from the Eurozone, Japan, United Kingdom, and United States, we perform out‐of‐sample forecasts using a rolling window; the results suggest that the model with government bond returns performs best against the random walk, although the results vary across countries, particularly when we compare the forecasts with those produced by a version of uncovered interest parity (UIP). [ABSTRACT FROM AUTHOR]

This paper analyzes the time‐varying causality between government bond and oil returns of the United States over the monthly period of 1859:10 to 2019:03, that is, the longest possible span of historical data, starting from the beginning of the modern era of the petroleum industry. While the standard constant parameter causality test fails to pick up any evidence of causality, the time‐varying framework shows evidence of bi‐directional spillovers over the entire sample period. The results are robust to the inclusion of stock returns as a control variable in the model. We also detect evidence of time‐varying causality‐in‐volatility between sovereign bond and oil markets, as well as spillovers in returns and volatility from the oil market to corporate bonds. [ABSTRACT FROM AUTHOR]

This paper examines the effects of COVID‐19 new infections on the financial sovereign risks in the group of ten (G10) countries. The paper utilises panel least squares regression using monthly data over the period February 2020–July 2021. Two sovereign risk measures are examined: the Spread of Government Bond Yields and Sovereign Credit Default Swap spread. The results of the robustness tests show that the spread of the COVID‐19 has affected the sovereign risks significantly and positively. Contagion risks have been extended to exchanges rates and growth rates of international reserves. This paper offers two contributions. First, the results show robust evidence on the impact of COVID‐19 on country's sovereign risks. Second, the severity of COVID‐19 on country's sovereign risks is further. The empirical results carry policy implications that (a) countries must sustain efforts for safeguarding the evolution of COVID‐19 pandemic since it is hindering country's credit worthiness, thus increasing sovereign risks, (b) the G10 countries are advised to follow the zero COVID‐19 strategy, (c) macro prudential measures have to be implemented along with monetary policies that mitigate the sovereign risks and (d) implement social measures to restore the health system and contain the uncertainty on both economic and social grounds. [ABSTRACT FROM AUTHOR]

We investigate the robust determinants of the West Texas Intermediate/Brent oil price differential by employing a time‐varying framework. To achieve this, a dynamic model averaging framework is used, considering monthly data over the period 1994:1–2021:3. Our results suggest that the convenience yield, the global economic activity index, and the government bond yields act as the main factors that exercise a persistent and significant impact, for the largest part of the study period, although at different magnitude. More importantly, though, we show that at different time periods there are additional factors that exercise a significant impact on the oil price differential, such as refining constraints, stock market volatility, trading volume, and geopolitical risk. Thus, unless a dynamic modeling framework is employed, the full spectrum of the related effects cannot be revealed. A series of tests confirm the robustness of our findings. Several policy implications of these results are also discussed. [ABSTRACT FROM AUTHOR]

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We test the usefulness of machine learning (ML) for the valuation and pricing of sovereign risk in the Euro area along two important dimensions: i) its predictive accuracy compared with traditional econometric methods, and ii) its assessment of the main economic factors underlying market perceptions of sovereign risk.We find that ML techniques can capture the dynamics inherent in the market valuation of country risk far more efficiently than traditional econometric models, both in the cross‐section and in the time series. Moreover, we show that public sentiment about financial news, redenomination fears and the degree of hawkishness/dovishness expressed in the ECB president's speeches are major contributors to sovereign bond spreads. We also confirm that macroeconomic and global financial factors affect sovereign risk assessment and the corresponding formation of sovereign spreads. [ABSTRACT FROM AUTHOR]

We evaluate the macroeconomic effects of long‐term sovereign‐bond purchases by the central bank in an economy that is likely to be characterized by a low equilibrium real interest rate and a non‐negligible probability of hitting the zero lower bound (ZLB) on the monetary‐policy rate. Our analysis is based on simulations of a dynamic general equilibrium model for the euro area. The main results are the following. First, long‐term sovereign‐bond purchases reacting to a positive inflation gap help stabilize macroeconomic conditions when the monetary‐policy rate hits the ZLB. Second, these purchases are an effective stabilization tool following positive shocks to the sovereign term premium and negative shocks to aggregate demand. Third, to stabilize the effects of expansionary demand shocks, the central bank can increase the monetary‐policy rate according to an 'aggressive' Taylor rule, instead of selling long‐term sovereign bonds. [ABSTRACT FROM AUTHOR]

In this article, we use time‐varying VAR models to study the effects of option‐implied measures of equity and bond market volatilities on the government bond term premium and key macroeconomic variables. We show that the high correlation between the two volatilities requires the shocks to these variables to be jointly identified. We find that a positive shock to the VIX reduces the term premium. We interpret this effect as the result of investors shifting their portfolios away from riskier assets. Also, a positive shock to the VIX has contractionary and disinflationary effects. By contrast, a positive shock to the Merrill Lynch Option Volatility Expectations (MOVE), which reflects heightened uncertainty about future changes in interest rates, raises the term premium. Similar to a VIX shock, an increase in bond market volatility also has a contractionary effect, although the negative effects on output and inflation are smaller. Both VIX and MOVE shocks resemble negative demand shocks, albeit of different intensity, to which the central bank responds by easing monetary policy. Depending on the type of volatility impacting the economy, a contraction in output can be associated either with a flattening or steepening of the yield curve. [ABSTRACT FROM AUTHOR]

Summary: US yield curve dynamics are subject to time‐variation, but there is ambiguity about its precise form. This paper develops a vector autoregressive (VAR) model with time‐varying parameters and stochastic volatility, which treats the nature of parameter dynamics as unknown. Coefficients can evolve according to a random walk, a Markov switching process, observed predictors, or depend on a mixture of these. To decide which form is supported by the data and to carry out model selection, we adopt Bayesian shrinkage priors. Our framework is applied to model the US yield curve. We show that the model forecasts well, and focus on selected in‐sample features to analyze determinants of structural breaks in US yield curve dynamics. [ABSTRACT FROM AUTHOR]

In this paper we examine the holdings of government securities by domestic banks along those of the foreign banks/non‐banks/official sector as well as the domestic central bank and domestic non‐banks, using data for 21 advanced economies from 2004Q1 to 2016Q2. The research offers four main insights. Firstly, banks are reluctant to undertake large changes in their holdings of domestic bonds but do accept frequent changes of more intermediate size. Secondly, the foreign official sector emerges as the clearest example of contrarian investor, which buys when prices fall and sells when prices rise. Thirdly, the yields of 10‐year benchmark sovereign bonds tend to be lower the larger the holdings by domestic and foreign banks are. Finally, we find in all countries of the sample a positive home bias in banks' sovereign holdings while foreign banks hold less than predicted by a neutral portfolio measure. These results suggest that banks regard domestic government bonds as a special asset class (hence the positive bias and the avoidance of large changes in inventories) which they manage in a flexible manner (hence the frequent intermediate changes and the lack of systematic timing of transactions) probably to meet requests from their customers. All in all, this behavior by domestic banks provides a positive contribution to the liquidity of the market as a whole. [ABSTRACT FROM AUTHOR]

No co‐movement is found among swap rates with a maturity of 10, 15, 20, and 30 years before the introduction of yield curve control (YCC) under Negative Interest Rate Policy (NIRP). On the other hand, they co‐move after the introduction, driven by a single common trend. No single pair of swap rates move together before the introduction, but every pair move together after the introduction. The function of the swap market was lost after the introduction of NIRP. This caused uncertainties regarding the formation of the yield curve among the market participants in the super long zone of the swap market. After the Bank of Japan (BOJ) introduced YCC to move the yield curve upward, particularly in moving the 10‐year Japanese Government Bond (JGB) yield to around zero percent, structural changes took place not only in JGB but also in swap markets. [ABSTRACT FROM AUTHOR]

We provide an empirical study on the sensitivity of capital gains of emerging market financial sector debts to the U.S. Treasury market in a three‐state Markov‐switching framework. Specifically, we model the capital gains change in a debt portfolio consisting of emerging market bonds as a linear regression of the capital gains change in a portfolio consisting of U.S. Treasury bonds in which the regression coefficients are allowed to switch between three regimes. Our analysis spans the period 2003–2016. We identify three regimes corresponding to positive sensitivity, insensitivity and negative sensitivity and provide economic explanations of our findings. We find that negative sensitivity regimes mostly occurred during the financial crisis. Our research advances understanding of the financial economics that governs the interdependence of interest rate risk and credit risk. By reassessing interest rate risk management through the prism of the downside risk hedge, our results shed light on how financial institutions may better withstand adverse financial conditions. [ABSTRACT FROM AUTHOR]

Faced with fiscal pressure and concerns over bureaucratic inefficiency, policymakers at Australia’s state government level are evaluating instruments to improve social housing services. A public–private partnerships (PPPs) procurement approach is one such instrument for increasing housing supply to address housing affordability in Australia. To determine the value of pursuing a project through a PPP delivery versus a traditional procurement approach, public administrators need to determine discount rates for comparing different cash flows streams on a consistent basis. Additionally, they must estimate public sector comparator (PSC) to determine public sector’s risk exposure in social housing delivery and allocating constrained housing budgets. This research assesses the discount rates and estimates the risk profile of social housing delivery faced by public agencies. Three case studies were utilised to present project estimate probability distributions for gaining insight into risk exposure in social housing delivery and helping housing budget allocation at the state government level. The findings recommend the use of an estimated 30-year treasury bond rate (3.14%) as the PSC discount rate for social infrastructure. Additionally, the results suggest the use of a PPP discount rate for social housing of 6.01%, given a risk-free rate of 3.14% and a systematic risk premium of 2.87%. [ABSTRACT FROM AUTHOR]

In the short term, central bank open market operations and quantitative easing reshape the term structure for the yields on government liabilities (inclusive of the monetary base). When necessary, the technocrats working in the central bank raise interest rates to achieve a particular inflation target, and democratically elected politicians then dutifully raise taxes or lower spending to accommodate the fiscal implications of these higher rates. Inflation may have real effects, but New Keynesian models allow for potentially an infinite number of not only inflation rates, but levels of output consistent with equilibria (see T. Lubik and F. Schorfheide, F., "Testing for indeterminacy: An application to US monetary policy", I American Economic Review i , I 94 i , [2004], pp. 190-217). [Extracted from the article]

Under the International Financial Reporting Standard 9 framework, we analyze the trade‐off of classifying a financial asset at amortized cost versus at fair value. Defining an impairment model and based on historical (2003–2019) data for the 10‐year Portuguese Government bonds, we analyze the annual performance (income/comprehensive income) of different investment allocations. Setting as objectives the maximization of the income and the minimization of the semivariance of the comprehensive income, we suggest a biobjective model in order to find efficient allocations. Given the nonsmoothness of the semivariance function, we compute the solution of the suggested model by means of a multiobjective derivative‐free algorithm. Assuming that the yields and funding rates follow a correlated mean‐reverting process and that the bonds' rating dynamics are described by an ordinal response model, we show a possible approach to mitigate the estimation error ingrained in the proposed biobjective stochastic model. Finally, we assess the out‐of‐sample performance of some of the suggested efficient allocations. [ABSTRACT FROM AUTHOR]

May European Union (EU) member states, in the pursuit of enforcing the norms of 'EU justice', unilaterally adopt harmful policies that are ordinarily impermissible in the course of voluntary cooperation amongst democratic states? Though conditions of permissible vigilantism are strict and only rarely met, there are some basic EU duties the compliance with which each individual member state is permitted to enforce unilaterally. Such measures are sometimes permissible even if European community law says otherwise: to the extent that European law prevents states from enforcing these duties, it lacks authority. [ABSTRACT FROM AUTHOR]

We estimate local projections to explore how fiscal policy in euro area periphery countries responds to monetary policy shocks that lower sovereign bond yields. In particular, we assess whether the disciplining effect of financial markets on public finances is undermined by the ability of monetary policy to affect the conditions of external funds. We find that the fiscal balance, on average, improves in response to monetary policy surprises that bring down yields on sovereign bonds. [ABSTRACT FROM AUTHOR]

Two contradictory strands of the rating literature criticize that rating agencies merely follow the market on the one hand, and emphasizing that rating changes affect capital movements on the other hand. Both focus on explaining rating levels rather than the timing of rating announcements. Contrarily, we explicitly differentiate between a decision to assess a country and the actual rating decision. We show that this differentiation significantly improves the estimation of the rating function. The three major rating agencies treat economic fundamentals similarly, while differing in their response to other factors such as strategic considerations. This reconciles the conflicting literature. [ABSTRACT FROM AUTHOR]

We study the sovereign bond market co‐movements and spillovers within 10 EMU countries, the so‐called "periphery" and "core" countries, during the period 1999:01 to 2016:07. Implementing Generalized Methods of Moments (GMM) within a panel setting and bivariate VAR analysis, we find that an increase in the lagged spreads of Italian and Austrian bonds negatively affect the spreads of the whole sample while the increase in the Irish, Portuguese, Belgian and French lagged yields increased the overall spreads. In the VAR analysis we find that spillover effects within the sample are mostly positive. [ABSTRACT FROM AUTHOR]

Structural changes have taken place in the markets of credit default swap (CDS) and Japanese Government Bond (JGB) after the Bank of Japan (BOJ) introduced yield curve control (YCC) under a negative interest rate policy. CDS and JGB markets were segmented before the introduction of YCC. Whether CDS markets function as insurance against the JGB market or cannot be confirmed because no causalities were found between CDS and JGB markets. However, they are integrated under a negative interest rate policy with YCC. The CDS market does not function as insurance because unilateral causalities from CDS to JGB markets were found. The purpose of YCC's introduction was an upward adjustment of the yield curve because the flattening of the yield curve damaged bank profits. A positive yield in a 10‐year JGB has become an incentive to investors. The markets of CDS and JGB have started to be integrated because JGB has regained a market and price discovery function with the introduction of YCC. [ABSTRACT FROM AUTHOR]

In this paper, we examine the impact of the charter form of government on the borrowing costs of local governments. A substantial amount of research has been undertaken to date in which scholars have investigated the determinants of borrowing costs for governments. However, little research has been conducted hitherto on the impact that the particular form of government - a key issuer characteristic - has on determining its specific borrowing costs. We hypothesized that a chartered government is more likely to be able to reduce its borrowing costs when it is benefiting from the municipal bond market; a government's flexibility and professionalism is desirable. We tested this hypothesis by using city and county government bond data from California that dates from 2003 to 2015. In our findings, we show that the financial flexibility that is afforded by a charter helps local governments to improve their credit ratings and to lower their borrowing costs. [ABSTRACT FROM AUTHOR]

One session options (OSOs) fulfill the criteria for a lottery‐type asset; a low price coupled with a relatively small probability of a large payoff. We examine trading behavior for intraday OSO contracts on the Australian 3‐Year Treasury bond future. We find that volume is higher on days with a major macroeconomic announcement, and concentrated in the time before data release. Volume tends to be higher when there is a greater difference of opinion concerning the announcement outcome or when the level of economic policy uncertainty is higher. We propose that 'differences of opinions' best explain OSO trading behavior. [ABSTRACT FROM AUTHOR]

One of the proposals that have been brought forward regarding ways of discouraging banks from taking unnecessary risk, widely debated these days, is the introduction of taxes in the financial sector. Although recent empirical investigations document a positive effect of the bank levies (BL), it may also reduce banks' activity. In this paper, we aim to analyse the Polish BL on assets. Poland's interbank market might be affected by a new BL introduced in 2016, as interbank positions of the balance sheet have been also taxed. The analysis covers the panel structure of data of Polish banks with unconsolidated financial statements. To evaluate the impact of the BL on the above interbank market features, we use the OLS regression with fixed effects in relation to the bank. Data has been sourced from OrbisFocus and Central Banks' websites and covers the period 2011–2017. The result demonstrates that the BL on assets applied in Poland has a negative impact on the interbank market. Estimation results shows that the BL on assets significantly decrease the value of 1y and increases the value of 3 months interbank loans. In addition, the BL on assets in the banking sector positively affects the value of government securities and negatively affects the interest income on interbank loans. Moreover, the dispersion of 1 and 3 months quotations was reduced as a result of the BL introduction. In case of short‐term transactions, dispersion amplifies. Additionally, the volatility of quotation decreases due to reduced trading after the BL implementation. [ABSTRACT FROM AUTHOR]

This study investigates the transmission mechanism of Asia‐Pacific sovereign bond yields using a monthly data set, which reaches over the period from January 2003 until December 2017. Sovereign bond yields are decomposed into three latent factors – level, curvature and slope – using the dynamic Nelson–Siegel procedure proposed by Diebold and Li, Journal of Econometrics, 2006, 130(2), 337–364. The yield curve propagation mechanism is examined using the dynamic connectedness framework of Diebold and Yılmaz, Journal of Econometrics, 2012, 182(1), 119–134 and Diebold and Yılmaz, Journal of Econometrics, 2014, 182(1), 119–134 which is based on a time‐varying parameter vector auto‐regression (TVP‐VAR). The results suggest that the net transmitters of shocks are Australia, Hong Kong, Korea and Singapore whereas China, India, Indonesia, Japan and Malaysia have been net receivers of shocks. Across factors, those results are consistent except for the Korean curvature factor. In addition, findings revealed that the highest market interconnectedness can be found in the level factor followed by the slope and the curvature factor. Notably, all dynamic connectedness indices strongly increased during the Global Financial Crisis (2009), which illustrates that the Asia‐Pacific monetary policy is interconnected with each other especially during periods of economic unrest. [ABSTRACT FROM AUTHOR]

This research studies the strategy of risk evaluation of China government bonds with the latest data. The angle of evaluation focuses on the interest rate and the stability risk, employing the EWMAVaR and SVM methods. The weights of each risk indicator are determined by the entropy method. Experimental results show that the risk of government bonds is stable in recent years. However, the impact of COVID-19 cannot be ignored because the risk level increased in the year 2020. The issuing of one trillion special antipandemic bonds could explain the fluctuation of the market because the fiscal incomes of Chinese government decreased in 2020 and could not be recovered in a short time. The experimental results show that the method proposed in this paper has a better performance than the existing methods, and it can help well in realizing the risk assessment of government bonds. [ABSTRACT FROM AUTHOR]

This paper modifies the income determination model to focus on two viable policies that would raise income in Greece with the government facing sizeable interest and debt payments. The usual macroeconomic policy options are unavailable in the Euro Zone with the balanced budget constraint, outside currency and fixed interest rate. On the monetary side, banking policy reform would eliminate bank account restrictions and mandatory purchase of government bonds. On the real side, investment policy reform would streamline the rent seeking bureaucracy. Together these policy reforms lead to income overshooting with a transitory trade surplus raising the money supply. [ABSTRACT FROM AUTHOR]

The yield spread of South African to United States 10‐year government bonds over the last 5 years has increased substantially to levels approaching those last seen during the mid‐1980s. This paper examines the association between the spread and macroeconomic fundamentals over the 1960–2019 sample period, under the GARCH and GARCH‐M class of estimators. We find that higher South African economic growth, lower inflation, public and private debt, as well as rand–dollar appreciation are all associated with a statistically significantly lower South African–United States yield spread. The strongest impact is associated with the public debt‐to‐GDP ratio. Mean spread levels do not appear to be influenced by yield volatility. Finally, while there is no evidence of sign bias in the impact of shocks on yield volatility (negative shock impacts are no different than positive), there is evidence of size bias for both positive and negative shocks: larger shocks have a larger impact on volatility than small, regardless of their sign. Collectively, and even ignoring the impact of private sector leveraging, South Africa's performance in these macroeconomic fundamentals is associated with an increase in the South African–United States yield spread of 363 basis points (since 2012). [ABSTRACT FROM AUTHOR]

We document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long‐term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire‐sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire‐sale risk in the sovereign bond market. [ABSTRACT FROM AUTHOR]