Backus, Gregory, and Zin (1989) demonstrate the failure of a standard model in accounting for the sign and the magnitude of real bond risk
It's actually also about the rise of electronic trading platforms, the rise of different ways to trade bond risk
through things like an ETF.
Li Daokui, director of the Centre for China in the World Economy at the Tsinghua University School of Economics and Management and a member of the Chinese People's Political Consultative Conference, said, 'Allowing banks to participate in treasury bond transactions on exchanges will permit improved regulation of treasury bond risk
, and heighten the stability of the spot market.'
By contrast, investors are currently not being well compensated for investment grade bond risk
, in our view.
For example, taking a Credit Default Swap of 200 basis points for an investment-grade instrument (Baa) as a reference, using Moody's (2008) non-payment statistics, with a recovery rate of 37% over an investment term of five years, the bond risk
premium is 176 basis points, which is 24 basis points less than the CDS.
In the model, the liquidity factor is regarded as an additional factor that does not span the yield curve, but improves the forecast of bond risk
The Markit iTraxx Europe Senior Financial Index of credit-default swaps on banks and insurers climbed 31 basis points to 126 basis points, also the biggest increase since 2007, according to data compiled by Bloomberg.
Michael Bauer and Glenn Rudebusch argue that similar measures of expectations may mismeasure the signaling effect because they ignore the effects of QE on bond risk
A repeat of the 2011 Eurozone debt crisis is almost assured in 2015 and yet financial markets price EU bond risk
as though it was negligible and Draghi's European Central Bank actually can buy bonds.
In fact, corporate bond risk
premiums in Sweden did not diverge much from economic fundamentals and only began to increase in 2011 after most of the policy rate increases took effect, as the chart on the next page shows.
We start by examining how the bonds issued by the largest banks over the 1985-2009 period compare with those issued by smaller banks in terms of their credit spreads over Treasury securities of the same maturity, controlling for bond risk
and other factors that may affect bond spreads.
Modest adjustment of the criteria used in mortgage bond risk
modeling would have radically altered the expected outcome, in some cases changing a huge profit to a disastrous loss.