Credit and Liquidity Risk in Sovereign Bonds

This master thesis, builds on the contributions by Ejsing et al. (2012) and Dubecq et al. (2013) to shed light on the credit and liquidity risk components of sovereign bond yields. Four countries have been studied: France, the Netherlands, Germany and Spain. The task has been faced by considering several state-space models, all of them connected by the idea that the differences in the yields between agency and sovereign bonds mainly correspond to liquidity reasons. The estimated credit and liquidity latent factors capture two distress periods, coinciding with the banking crisis and the sovereign debt crises. At those times we appreciate that the credit factor pushes up the yield to maturity of the bonds, while the liquidity factor exerts downward pressure to it; in general, the credit effect dominates. We also identify a transversal credit effect across countries that allows to distinguish idiosyncratic (credit) patterns. _ Álvaro Martín Herrero Oliver Wyman [email protected]