Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193572
Authors: 
de Sola Perea, Maite
Dunne, Peter G.
Puhl, Martin
Reininger, Thomas
Year of Publication: 
2018
Series/Report no.: 
ESRB Working Paper Series 65
Abstract: 
The risk reducing benefits of the sovereign bond-backed security (SBBS) proposal of Brunnermeier et al (2011, 2016, 2017) have been assessed in terms of the likely losses that different kinds of holders would suffer under simulated default scenarios. However, the effects of mark-to-market losses that may occur when there is rising uncertainty about defaults, or when self-fulfilling destablising dynamics are prevalent, have not yet been examined. We apply the "VAR-for-VaR" method of White, Kim and Manganelli (2015) and the Marginal Expected Shortfall approach of Brownlees and Engle (2012, 2017) to estimated yields of SBBS to assess how ex ante exposures are likely to playout under various securitisation structures. We compare these with exposures of single sovereigns and a diversified portfolio. We find that the senior SBBS has extremely low ex ante tail risk and that, like the lowest-risk single-named sovereigns, it acts as a hedge against extreme adverse movements in the yields on more junior tranches. The mezzanine SBBS has tail risk exposure similar to that of Italian and Spanish bonds. Yields on SBBS appear to be adequate compensation for their risks when compared with single sovereigns or a diversified portfolio.
Subjects: 
Safe Assets
Sovereign Bonds
Value-at-Risk
Spillover
CAViaR
Co-Dependence
JEL: 
E43
E44
E52
E53
G12
G14
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-017-7
Document Type: 
Working Paper

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