Joint estimation of liquidity and credit risk premia in bond prices with an application
Presents an arbitrage‐free term structure model identifying liquidity and credit risk premia in South African bonds via empirical simulations.
What it examines
The study introduces an arbitrage-free dynamic term structure model that distinguishes security-specific liquidity risk from issuer-wide credit risk. Using observed bond prices from South African government bonds, the model aims to identify separate risk premia, validate estimation accuracy via simulations, and serve as a tool for assessing bond market risks.
What it concludes
The findings show distinct liquidity and credit risk premia in South African bonds, accurately estimated by the novel dynamic model. This research can improve risk management, inform pricing and policy decisions in emerging and corporate bond markets, and guide future studies on inflation-indexed bonds to better understand market stability.
Evidence objects
A novel and robust term structure model separates liquidity and credit premia in bond prices, revealing distinct time behaviors and proving both risks significant, yet emerging from distinct market forces.
key_findings bullet 1 · key_findings · validation V0
Surprisingly, liquidity premia surge sharply during market stresssuch as the global financial crisis and COVID-19while credit premia generally remain stable, with their weak negative correlation highlighting different underlying market pressures.
key_findings bullet 2 · key_findings · validation V0
Researchers develop the innovative AFNS-L-C model employing an extended Kalman filter on South African government bonds; simulations confirm its risk detection and pricing accuracy, although stringent parameter restrictions limit applicability.
key_findings bullet 3 · key_findings · validation V0
Introducing a novel arbitragefree dynamic term structure model, the paper uniquely distinguishes security-specific liquidity risk from the common credit risk across bonds. It builds on established AFNS models and square-root processes, offering a fresh, integrative approach to emerging market sovereign bonds and providing compelling, impactful insights for fixed income analysis.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … process to ensure nonnegativity and econometric identification. A simulation study … This variation provides the foundation for the econometric identification of the factors …
Source row: 1141 · abstract type: snippet