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http://hdl.handle.net/10419/45285
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| Title: | | Uncovering the common risk free rate in the European Monetary Union  |
| Authors: | | Wagenvoort, Rien Zwart, Sanne |
| Issue Date: | | 2010 |
| Series/Report no.: | | Economic and financial reports / European Investment Bank 2010/05 |
| Abstract: | | We introduce Longitudinal Factor Analysis (LFA) to extract the Common Risk Free (CRF) rate from a sample of sovereign bonds of countries in a monetary union. Since LFA exploits the typically very large longitudinal dimension of bond data, it performs better than traditional factor analysis methods that rely on the much smaller cross-sectional dimension. European sovereign bond yields for the period 2006-2010 are decomposed into a CRF rate, a default risk premium, and a liquidity risk premium, shedding new light on issues such as benchmark status, flight-to-quality and flight-to-liquidity hypotheses. Our empirical findings suggest that investors chase both credit quality and liquidity, and that liquidity is more valued when aggregate risk is high. |
| Subjects: | | factor analysis risk free interest rate sovereign bond benchmark |
| JEL: | | C19 E43 G12 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Economic and Financial Reports, European Investment Bank
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