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What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality

Costantini, Mauro and Sousa, Ricardo M. (2022) What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality. Journal of International Money and Finance, 122. ISSN 0261-5606

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Identification Number: 10.1016/j.jimonfin.2021.102574

Abstract

We use a panel of 10 euro area countries over the period 1996Q1-2017Q4 to show that heightened uncertainty leads to (i) a flight to “safety” and (ii) a flight to “quality” in sovereign bond markets. Global, macroeconomic and the common euro area uncertainty outperform country-level, financial and euro area idiosyncratic uncertainty in forecasting sovereign bond risk premia, respectively. A rise in economic policy uncertainty also pushes investors to demand a disproportionately larger premium to hold “risky” bonds versus the “safe-haven” bond. Finally, business and economic related uncertainty is of first-order importance, while politics and government uncertainty plays a somewhat secondary role. Our results are robust to yield curve inversions, risk rating metrics, (non-standard) monetary policy conditions and the occurrence of sovereign debt crises.

Item Type: Article
Additional Information: Funding Information: NIPE’s work is financed by National Funds of the FCT - Portuguese Foundation for Science and Technology within the project “UIDB/ECO/03182/2020”. Publisher Copyright: © 2021 Elsevier Ltd
Divisions: Economics
Date Deposited: 07 May 2024 13:54
Last Modified: 09 Nov 2024 07:03
URI: http://eprints.lse.ac.uk/id/eprint/122960

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