Affiliation:
1. Interdisciplinary Center, The Arison School of Business
2. Consultant to AQR
3. AQR Capital Management
4. New York University
5. National Bureau of Economic Research
Abstract
Abstract
It is well-documented that government bonds with almost identical cash flows can trade at different prices. This article analyzes the cross-section of bond spreads across developed European countries and documents a novel result. While a measure of the convenience yield of government bonds helps explain these spreads, it cannot explain the behavior of bond spreads in periods of widening credit risk. The article documents bond spreads between new and old issues tighten for low-quality sovereigns. In other words, the newer more liquid bonds become cheaper, not more expensive, relative to their older counterparts. We offer an explanation based on price pressure and provide empirical support using data on net flows of investors in sovereign bonds.
Publisher
Oxford University Press (OUP)
Subject
Finance,Economics and Econometrics,Accounting
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