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Risk protection from risky collateral: Evidence from the euro bond market

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  • Helberg, Stig
  • Lindset, Snorre

Abstract

This paper studies empirically how collateral protects the market value of defaultable bonds from changes in risk. We construct a measure of the risk protection from collateral, and estimate it under different economic conditions. Using yields from the euro bond market, we find that the risk protection from collateral is conditional, significantly stronger in both general and issuer-specific bad states. However, the collateral is risky, and a fall in the collateral value clearly lowers the risk protection. Consequently, the correlation between the bad state and the collateral value is crucial when assessing the risk reducing properties of collateral.

Suggested Citation

  • Helberg, Stig & Lindset, Snorre, 2016. "Risk protection from risky collateral: Evidence from the euro bond market," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 193-213.
    • Handle: RePEc:eee:jbfina:v:70:y:2016:i:c:p:193-213
    DOI: 10.1016/j.jbankfin.2016.06.001
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    Cited by:

    1. Stig Helberg & Snorre Lindset, 2020. "Collateral affects return risk: evidence from the euro bond market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(1), pages 99-128, March.
    2. Chuc Anh Tu & Tapan Sarker & Ehsan Rasoulinezhad, 2020. "Factors Influencing the Green Bond Market Expansion: Evidence from a Multi-Dimensional Analysis," JRFM, MDPI, vol. 13(6), pages 1-14, June.
    3. Docherty, Paul & Easton, Steve, 2018. "State-varying illiquidity risk in sovereign bond spreads," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 235-248.

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    More about this item

    Keywords

    Collateral; Secured debt; Covered bonds; Credit risk; Liquidity risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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