#RISK PREMIUM GREEK SYMBOL DRIVERS#
#RISK PREMIUM GREEK SYMBOL DRIVER#

Amihud and Mendelson (1986) and Longstaff (2009) both propose models with different types of investors, in which the longer-horizon investors receive a premium for holding less liquid assets. Investors with the longest horizons should prefer to hold higher yielding assets if the elevated yields represent compensation for deteriorating market conditions, but not necessarily if they represent a greater risk of loss due to default.

Understanding the default and liquidity components in interest rates is important for portfolio allocation and policy decisions. In contrast, before 2007, these spreads were roughly constant near zero, making identification almost impossible. The years after 2007 are an ideal period to study the liquidity and credit components of sovereign and interbank spreads because they were so variable both over time and in the cross section. Two possible influences that are explored in this article are credit, reflecting compensation for heightened default risk ( McAndrews, Sarkar, and Wang, 2008 Taylor and Williams, 2009 Beber, Brandt, and Kavajecz, 2009 Afonso, Kovner, and Schoar, 2011 FilipoviД‡ and Trolle, 2013), and market liquidity, reflecting trading conditions in asset markets ( Michaud and Upper, 2008 Acharya and Skeie, 2011). Interbank spreads show a strong role for aggregate bond market liquidity, over and above the effects of interbank credit and liquidity throughout the sample period.Д«eyond the expected path of future short-horizon interest rates, it is difficult to empirically determine what drives sovereign bond yields or interbank rates, especially at times of market stress.

#RISK PREMIUM GREEK SYMBOL DRIVER#

In contrast, during the subsequent Debt Crisis, default risk becomes a relatively larger driver of average sovereign spread widening. In the sovereign bond market, an equal-weighted average across countries and maturities attributes 36% of the trough-to-peak spread widening over the Financial Crisis to deteriorating sovereign bond market liquidity and 22% to heightened default risk (consistent with the finding of Bao, Pan, and Wang, 2011, in the corporate bond market over this period). However, the importance of liquidity relative to default risk differs by country and over time in a way that is consistent with important credit and liquidity events in asset markets during the Financial and Debt Crises (e.g., the Greek governmentвЂ™s debt restructuring and the central banksвЂ™ extraordinary liquidity provision). The results show that aggregate market liquidity is an important contributor to euro-area sovereign debt and money market spreads over the entire sample period.

#RISK PREMIUM GREEK SYMBOL DRIVERS#

The measure is used to parse these historic movements, and to compare and contrast the spread widening drivers in the two crisis periods. This article documents a model-free measure of Euro-area market liquidity, constructed directly from asset prices. One hurdle to identification is the difficulty in precisely capturing the risk components in prices. Despite the enormity of these interest rate movements, there has been a lack of consensus on the dominant driver.

Spreads generally narrowed in 2010, before widening again in the subsequent Sovereign Debt Crisis. In the money market, spreads between unsecured interbank borrowing rates (EURIBOR) and overnight-indexed swap (OIS) rates of comparable maturities also rose by more than an order of magnitude in the Financial Crisis EURIBOR-OIS spreads reached their widest levels since the inception of the OIS market, and peaked to an all-time high in October 2008. One example is the increase in Euro-area government bond spreads, which rose by more than an order of magnitude in the Financial Crisis, to levels not seen since the introduction of the common currency in 1999. The 2007вЂ“2009 Global Financial Crisis and the European Debt Crisis were marked by extraordinary interest rate spread widening and heightened volatility in asset prices, contributing to a broad tightening of financial conditions.

Risk premium greek symbol