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1 – 10 of over 9000Colin Jones, Neil Dunse and Kevin Cutsforth
The purpose of this paper is to analyse the gap between government bonds (index-linked and long-dated) and real estate yields/capitalization rates over time for the UK, Australia…
Abstract
Purpose
The purpose of this paper is to analyse the gap between government bonds (index-linked and long-dated) and real estate yields/capitalization rates over time for the UK, Australia and the USA. The global financial crisis was a sharp shock to real estate markets, and while interest rates and government bond yields fell in response around the world, real estate yields (cap rates) have risen.
Design/methodology/approach
The absolute yield gap levels and their variation over time in the different countries are compared and linked to the theoretical reasons for the yield gap and, in particular, a changing real estate risk premium. Within this context, it assesses whether there have been structural breaks in long-term relationships during booms and busts based on autoregressive conditionally heteroscedastic (ARCH) models. Finally, the paper provides further insights by constructing statistical models of index-linked and long-dated yield gaps.
Findings
The relationships between bond and property yields go through a traumatic time around the period of the global financial crisis. These changes are sufficiently strong to be statistically defined as “structural breaks” in the time series. The sudden switch in the yield gaps may have stimulated a greater appreciation of structural change in the property market.
Research limitations/implications
The research focuses on the most transparent real estate markets in the world, but other countries with less developed markets may respond differently.
Practical implications
The practical implications relate to how to value real estate yields relative to interest rates.
Originality/value
This is the first paper that has compared international yield gaps over time and examined the role of the gap between index-linked government bonds and real estate yields.
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Dionisis Philippas and Costas Siriopoulos
– The authors aim to investigate the cointegrating relationship of the government bond yields, driven by the common money factors in European Monetary Union (EMU).
Abstract
Purpose
The authors aim to investigate the cointegrating relationship of the government bond yields, driven by the common money factors in European Monetary Union (EMU).
Design/methodology/approach
By adopting a dynamic ARDL transformation, the paper provides short-/long-term estimates of bond yields convergence before the burst of the current debt crisis. It also investigates how the degree of convergence between bond yields, driven by money factors, is affected in short/long runs.
Findings
The findings indicate that the introduction of the common currency has not a uniform effect on the bond yields, and there is a nominal convergence between EMU bond yields based on money market determinants.
Originality/value
The current financial crisis indicates that the EMU bond market convergence was temporary and it can be highly affected by an exogenous shocks and the sentiment of international investors. The findings imply the necessity for a common monetary and fiscal policy in Euro zone countries.
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Miguel Rodriguez Gonzalez, Frederik Kunze, Christoph Schwarzbach and Christoph Dieng
This paper aims to investigate the long-term relationships of long-term European Monetary Union (EMU) government bond yields. From an asset managers’ or risk managers’ perspective…
Abstract
Purpose
This paper aims to investigate the long-term relationships of long-term European Monetary Union (EMU) government bond yields. From an asset managers’ or risk managers’ perspective during the euro crisis, the relevance of sovereign credit and redenomination risk became a major issue. Furthermore, it has to be differentiated between core and non-core EMU member countries.
Design/methodology/approach
Methods of applied time series analysis are used to investigate EMU government bond yields and EMU government bond yield spreads for Spain, Italy, The Netherlands, Austria and Germany. Both standard unit root testing procedures and breakpoint unit root tests are used to examine cointegrating relationships and structural changes in these relationships.
Findings
The empirical results deliver clear evidence for structural shifts in the long-term relationship between German and the two non-core EMU countries (Italy and Spain). The timing of the breaks coincides with the timing of the euro crisis. On the contrary, the results for Austria and The Netherlands are different from the findings for the two non-core countries.
Research limitations/implications
One major limitation of the study is the limited availability of data regarding to the reaction of asset managers or risk managers to the euro crisis. Especially in the context of the discussion with regard to the relevant risk-free rate for investors, this strand of research is relatively new.
Practical implications
A deeper understanding of changes in the long-term relationship between government bond yields and the re-emergence of redenomination risk is important for asset managers and risk managers in the financial services industry. This is especially true for German life insurers.
Originality/value
The study provides various empirical contributions to the literature on the euro crisis and sovereign credit risk. First, previous results with regard to the structural changes in the long-term relationship between German and Spanish, German and Italian, German and Austrian as well as Germany and Dutch government bond yields are confirmed using unit root breakpoint tests. Second, investigating the autoregressive coefficient and the timing of the breaks delivers evidence that non-core countries have been more exposed to the fear of redenomination risk. Third, we raise the question which risk free interest rate is relevant for the affected countries.
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Iuliana Matei and Angela Cheptea
Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European…
Abstract
Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European government bond market. But what are the main drivers of this “perfect storm” that since 2009 affects EU government bond market as well? To answer this question, we propose an empirical study of the determinants of the sovereign bond spreads of EU countries with respect to Germany during the period 2003–2010. Technically, we address two main questions. First, we ask what share of the change in sovereign bond spreads is explained by changes in the fundamentals, liquidity, and market risks. Second, we distinguish between EU member states within and outside the Euro area and question whether long-term determinants of spreads affect EU members uniformly. To these ends, we employ panel data techniques in a regression model where spreads to Germany (with virtually no default risk) are explained by set of traditional variables and a number of policy variables. Results reveal that large fiscal deficits and public debt as well as political risks and to a lesser extent the liquidity are likely to put substantial upward pressures on sovereign bond yields in many advanced European economies.
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Might the impact of the global economic policy uncertainty (GEPU) and the long-term bond yields on oil prices be asymmetric? This paper aims to consider the effects of the GEPU…
Abstract
Purpose
Might the impact of the global economic policy uncertainty (GEPU) and the long-term bond yields on oil prices be asymmetric? This paper aims to consider the effects of the GEPU and the US long-term government bond yields on oil prices using quantile-based analysis and nonlinear vector autoregression (VAR) model. The author hypothesized whether the negative and positive changes in the GEPU and the long-term bond yields of the USA have different effects on oil prices.
Design/methodology/approach
To address this question, the author uses quantile cointegration model and the impulse response functions (IRFs) of the censored variable approach of Kilian and Vigfusson (2011).
Findings
The quantile cointegration test showed the existence of non-linear cointegration relationship, whereas Granger-causality analysis revealed that positive/negative variations in GEPU will have opposite effects on oil prices. This result was supported by the quantile regression model’s coefficients and nonlinear VAR model’s IRFs; more specifically, it was stressed that increasing/decreasing GEPU will deaccelerate/accelerate global economic activity and thus lead to a fall/rise in oil prices. On the other hand, the empirical models indicated that the impact of US 10-year government bond yields on oil prices is asymmetrical, while it was found that deterioration in the borrowing conditions in the USA may have an impact on oil prices by slowing down the global economic activity.
Originality/value
As a robustness check of the quantile-based analysis results, the slope-based Mork test is used.
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Dionisis Chionis, Ioannis Pragidis and Panagiotis Schizas
The purpose of this paper is to uncover the determinants of the ten-year Greek bond yield in both pre- and post-crisis period that caused the unprecedented event, a country member…
Abstract
Purpose
The purpose of this paper is to uncover the determinants of the ten-year Greek bond yield in both pre- and post-crisis period that caused the unprecedented event, a country member of the Euro area, not to be able to tap the market. In doing so, following the recent literature, the authors employ two major set of variables, market driven and macroeconomic variables and the authors find two classes of results. Among others, debt to GDP ratio, deficit, inflation and unemployment, play a more significant role as determinants of the ten-years Greek bond yield during the crisis and second, the ten-years yield exceeds that fundamentals that price in. Moreover, the authors explicitly test for the impact of speculation on the yield. These results are in line with other empirical studies and shed line to the dramatic evolution of the bond yields in terms of fiscal consolidation era as it is in Greece. Since the Greek debt crisis is ongoing more than five years, policy makers should make substantial changes in their macro projections taking under consideration more the variables of inflation and unemployment, and release a viable concrete plan of debt relief, which among other, secures the success of the macro projections.
Design/methodology/approach
Empirical study on Greek debt crisis applying both macroeconomics and market indicators in separated estimations.
Findings
Debt to GDP ratio, deficit, inflation and unemployment among others, play a more significant role as determinants of the ten-years Greek bond yield during the crisis than had before and second, during the crisis ten-years yield is above the price that fundamentals would imply.
Originality/value
To the best of the authors’ knowledge it is the first time that the authors study the Greek debt crisis applying fundamental and market factors.
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In the light of past financial and economic turmoil, there has been a marked increase in the volatility in real estate markets. This has impacted on the pricing of property…
Abstract
Purpose
In the light of past financial and economic turmoil, there has been a marked increase in the volatility in real estate markets. This has impacted on the pricing of property assets, partly through market sentiment and particularly concerning risk. It also limits modelling accuracy model accuracy. The purpose of this paper is to create a new variable and model to enhance analysis of what drives real estate yields incorporating market sentiment to risk.
Design/methodology/approach
This paper specifically considers the modelling of property pricing within a volatile economic environment. The theoretical context begins by analysing the relationship between property yields and government bonds. The analytical context then moves on to specifically include a measurement of risk which stresses its role and importance in investment markets since the Global Financial Crisis. The model thus incorporates macroeconomic and real estate data, together with an international risk multiplier, which is calculated within the paper.
Findings
The paper finds the use of measurements of market sentiment and risk are more powerful tools for modelling yields than previous techniques alone.
Research limitations/implications
This is an initial paper outlining the creation of sentiment and risk measurements in the financial market and showing an example of its application to a commercial real estate market. The implication is that this could add a major new explanatory variable to modelling of yields.
Practical implications
The paper highlights the importance of risk in the pricing of commercial real estate, over and above normal variables. It highlights how this can help explain over and undershooting of yields within commercial real estate which would be of great importance in the investment world.
Originality/value
This paper attempts to explicitly measure market sentiment, pricing of risk and how this impacts real estate pricing.
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Alessandro Rebucci, Jonathan S. Hartley and Daniel Jiménez
This chapter conducts an event study of 30 quantitative easing (QE) announcements made by 21 central banks on daily government bond yields and bilateral US dollar exchange rates…
Abstract
This chapter conducts an event study of 30 quantitative easing (QE) announcements made by 21 central banks on daily government bond yields and bilateral US dollar exchange rates in March and April 2020, in the midst of the global financial turmoil triggered by the COVID-19 outbreak. The chapter also investigates the transmission of innovations to long-term interest rates in a standard GVAR model estimated with quarterly pre-COVID-19 data. The authors find that QE has not lost effectiveness in advanced economies and that its international transmission is consistent with the working of long-run uncovered interest rate parity and a large dollar shortage shock during the COVID-19 period. In emerging markets, the QE impact on bond yields is much stronger and its transmission to exchange rates is qualitatively different than in advanced economies. The GVAR evidence that the authors report illustrates the Fed’s pivotal role in the global transmission of long-term interest rate shocks, but also the ample scope for country-specific interventions to affect local financial market conditions, even after controlling for common factors and spillovers from other countries. The GVAR evidence also shows that QE interventions can have sizable real effects on output driven by a very persistent impact on long-term interest rates.
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Theory suggests that as long as a country runs a balanced budget regime, there is no linkage between fiscal variables and the interest rates. In the case of fiscal expansion that…
Abstract
Theory suggests that as long as a country runs a balanced budget regime, there is no linkage between fiscal variables and the interest rates. In the case of fiscal expansion that is not sufficiently covered by government revenues, however, the government has two options to finance its deficit: printing money or additional borrowing. Both options lead to an increase in the risk premia on government bonds. One strand of literature focuses on a currency crisis that emerges as a necessary outcome in light of contradictions between fixed exchange rate, and fiscal and financial fundamentals. If government bonds are denominated in domestic currency, the government can reduce their real value by higher inflation or by devaluation of the national currency. In order to bear this risk foreign investors require a currency risk premium. Governments can eliminate the risk of currency devaluation by issuing bonds denominated in foreign currencies, but the default risk remains and it depends on public finances. Another strand of the literature looks at the relation between fiscal variables and government bond yields in the framework of portfolio balance model.
Enrique Izquierdo-Cervera and Francisco Sogorb-Mira
The purpose of this study is to analyse the impact of the European Central Bank’s (ECB) Public Sector Purchase Programme (PSPP) on Spanish sovereign debt.
Abstract
Purpose
The purpose of this study is to analyse the impact of the European Central Bank’s (ECB) Public Sector Purchase Programme (PSPP) on Spanish sovereign debt.
Design/methodology/approach
The authors assess the impact of the PSPP on Spanish Government bonds from two different transmission channels (the signalling and the portfolio substitution) with two effects for each of them (the announcement and the expectation effects for the former and the stock and the rebalancing effects for the latter). The empirical study has been undertaken with event study methodology, controlled by macroeconomic variables, panel data and cross-sectional regression analyses.
Findings
The results show that both the ECB’s purchases under the PSPP and the announcements reduced Spanish Government bond yields. Compared to previous literature the Spanish Government bond yields reductions are larger than those for other countries.
Research limitations/implications
The authors’ approach to the impact of investors’ expectations is interesting, although they cannot draw evidence on this issue due to the lack of data.
Practical implications
From an economic perspective, the ECB can change economic agents’ expectations without actually carrying out any programme, only by announcing such a programme.
Originality/value
This paper contributes to the literature examining the PSPP from different transmission channels in Spain, taking into account the announcements, the expectations, the purchases and the variation in debt holdings relating to the PSPP from the beginning of the programme until 2020. Due to the large degree of heterogeneity across euro area countries, the results in this paper should improve our understanding of the relative differences in the impact of the PSPP and, thus, be of interest to academics and policymakers.
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