The role of credit quality for safe assets
In this paper Christensen and Mirkov use an arbitrage-free term structure model that accounts for time-varying premia in individual bond prices, to understand the role of credit quality for safe assets that are not particularly liquid. In particular, they look at Swiss government bonds, which are extremely safe but not particularly liquid and are related to the “safe haven” status of the Swiss franc, which implies that safe Swiss franc-denominated assets offer a hedging value against global risk. Some of their findings include:
- The introduction of the euro in January 1999 appears to have led to an upward shift of between 35 and 40 basis points in the Swiss safety premium. The possible justification for this shift might be the perceived implicit assumption of risk-sharing across eurozone countries that could have reduced the safety of government bonds in core eurozone countries such as Germany or France relative to that of Swiss government bonds.
- The scarcity of euro-area safe assets created by the ECB’s asset purchases since January 2015 might have reduced the relative exclusiveness of Swiss safe assets and thereby depressed their safety premium by about 20 basis points.
The Safety Premium of Safe Assets
Authors: Jens H. E. Christensen, Nikola Mirkov
From: Federal Reserve Bank of San Francisco, Swiss National Bank
