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Discussion ofSovereign Credit Risk, Liquidity, and the ECB
Intervention: Deus Ex Machina?By Loriana Pelizzon, Marti Subrahmanyam, Davide Tomio, Jun
Uno
Eric Ghysels
University of North Carolina at Chapel Hill
April 25, 2014
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 1
Introduction
▸ Interesting and innovative paper covering a lot ground:
▸ Funding vs Market liquidity▸ Sovereign bond premia▸ Central Bank interventions▸ Credit risk
▸ Discussion will focus on suggestions to improve/sharpensome of the findings.
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 2
Variable DescriptionSource: Nguyen, G. (2014). Funding Liquidity and Market Liquidity Spillovers
during the Euro Area Sovereign Debt Crisis, UNC–CH Working Paper.
▸ Sovereign Credit Risk:▸ Daily sovereign CDS spread (5–yr) for each country
▸ Funding Illiquidity:▸ First PC of panel of daily CDS spreads (5–yr, senior debt) ofmajor banks in each country (1/1/2010 value = 1)
▸ Market Illiquidity:▸ Daily bid ask spreads▸ Averaged across benchmark bonds with 9–11 YTM
▸ Volatility:▸ Daily standard deviation of 5–minute log midquote return (bps)▸ Averaged across benchmark bonds with 9–11 YTM of eachcountry
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 3
Time Series Variation 2010–2012
Sov
erei
gn C
DS
Spr
ead
(bps
)
2011 20120
120
240
360
480
600DEFRIT
(a) Sovereign Credit Risk
Fun
dLiq
Idx
2011 20120
2
4
6
8
10DEFRIT
(b) Funding Illiquidity
BA
Spr
ead
(bps
of M
idqu
ote)
2011 20120
30
60
90
120
150DEFRIT
(c) Mkt Illiquidity (22d MA)
StD
Log
Ret
(bp
s)
2011 20120
2
4
6
8
10DEFRIT
(d) Volatility (22d MA)Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 4
Data in Pelizzon et al.
Sov
erei
gn C
DS
Spr
ead
(bps
)
2011 20120
120
240
360
480
600
DEFRIT
(a) Sovereign Credit Risk
Fun
dLiq
Idx
2011 20120
2
4
6
8
10
DEFRIT
(b) Funding Illiquidity
BA
Spr
ead
(bps
of M
idqu
ote)
2011 20120
30
60
90
120
150
DEFRIT
(c) Mkt Illiquidity (22d MA)
StD
Log
Ret
(bp
s)
2011 20120
2
4
6
8
10
DEFRIT
(d) Volatility (22d MA)Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 5
ECB interventions during sample studied by Pelizzon et al.
Description & Date (My own)Acronym characterization
Securities Markets Programme (SMP)SMP2 Aug 8, 2011∗ TIMID
Long-Term RefinancingOperations (LTRO) Dec. 8, 2011 CLEVER
Outright MonetaryTransactions (OMT) July 26, 2012 BOLD
* Spreads on Italian and Spanish bonds decreased by almost 100 basis points
on 8 August 2011, after a press release stating that the ECB would actively
implement its Securities Markets Programme.
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 6
Time Series Variation 2010–2012
Sov
erei
gn C
DS
Spr
ead
(bps
)
SMP2 LTRO
2011 20120
120
240
360
480
600DEFRIT
(a) Sovereign Credit Risk
Fun
dLiq
Idx
SMP2 LTRO
2011 20120
2
4
6
8
10DEFRIT
(b) Funding Illiquidity
BA
Spr
ead
(bps
of M
idqu
ote)
SMP2 LTRO
2011 20120
30
60
90
120
150DEFRIT
(c) Mkt Illiquidity (22d MA)
StD
Log
Ret
(bp
s)
SMP2 LTRO
2011 20120
2
4
6
8
10DEFRIT
(d) Volatility (22d MA)Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 7
Time Series Variation 2010–2012
Sov
erei
gn C
DS
Spr
ead
(bps
)
2011 20120
120
240
360
480
600
DEFRIT
(a) Sovereign Credit Risk
Fun
dLiq
Idx
2011 20120
2
4
6
8
10
DEFRIT
(b) Funding Illiquidity
BA
Spr
ead
(bps
of M
idqu
ote)
2011 20120
30
60
90
120
150
DEFRIT
(c) Mkt Illiquidity (22d MA)
StD
Log
Ret
(bp
s)
2011 20120
2
4
6
8
10
DEFRIT
(d) Volatility (22d MA)Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 8
Time Series Variation 2010–2012
Sov
erei
gn C
DS
Spr
ead
(bps
)
SMP2 LTRO OMT
2011 20120
120
240
360
480
600DEFRIT
(a) Sovereign Credit Risk
Fun
dLiq
Idx
SMP2 LTRO OMT
2011 20120
2
4
6
8
10DEFRIT
(b) Funding Illiquidity
BA
Spr
ead
(bps
of M
idqu
ote)
SMP2 LTRO OMT
2011 20120
30
60
90
120
150DEFRIT
(c) Mkt Illiquidity (22d MA)
StD
Log
Ret
(bp
s)
SMP2 LTRO OMT
2011 20120
2
4
6
8
10DEFRIT
(d) Volatility (22d MA)Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 9
ECB Interventions
MKT LIQ FUNDING LIQ
SMP2 (TEMPORARILY) IMPROVED WORSENED
LTRO IMPROVED (TEMPORARILY) IMPROVED
OMT IMPROVED IMPROVED
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 10
ECB Interventions: Deus Ex Machina?
▸ Perhaps not all ECB interventions were as divine assuggested in the paper.
▸ An interesting extension/improvement of the paper mightbe to show that interventions which did not addressfunding risk had limited success.
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 11
ECB Interventions and MTS
Source: Ghysels, Idier, Manganelli and Vergote (2013) A highfrequency assessment of the ECB Securities Markets Programme,CEPR Discussion Paper No. 9778 (under revision)
▸ Uses intra-daily time stamped data on purchases of theECB Securities Markets Programme - in addition totiming: price, quantity, maturity, country.
▸ Finds a significant negative impact of SMP interventionson yields.
▸ Finds that SMP purchases succeeded in reducing volatilityof government bond yields of the countries under theprogramme.
▸ Note that ECB intervention do not take place via MTS.
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 12
Some econometric issues
▸ Structural break test is not Chow test, and testimplemented does not have an asymptotic F distribution.
▸ The test is a SupWald test, and its asymptoticdistribution is non-standard (for the same reason as thethreshold test has non-standard asymptotic distribution).See Andrews (1993).
▸ Easier procedure is SupLM test, see e.g. Ghysels (1998).
▸ Working with a larger sample, starting earlier (all of 2011and before) would also be beneficial.
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 13
Summing up
▸ Nice paper breaking new ground on the intriguingrelationship between liquidity/funding risk and policyinterventions.
▸ Suggestion to expand the analysis of ECB interventions -notably by including SMP2.
▸ Need to revisit structural break arguments.
Eric Ghysels Discussion of Pelizzon et. al. (2013) April 25, 2014 14