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.
What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality / Costantini, Mauro; Sousa, Ricardo M.. - In: JOURNAL OF INTERNATIONAL MONEY AND FINANCE. - ISSN 0261-5606. - 122:(2022), pp. 1-22. [10.1016/j.jimonfin.2021.102574]
What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality
Mauro Costantini;
2022
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.File | Dimensione | Formato | |
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