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Collateral affects return risk: evidence from the euro bond market

Author

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  • Stig Helberg

    (Norwegian University of Science and Technology)

  • Snorre Lindset

    (Norwegian University of Science and Technology)

Abstract

Covered bonds and senior bonds are prominent securities in the euro bond market. Senior bonds are unsecured, while covered bonds are secured—backed by collateral. Our results show that the presence of collateral reduces the total risk in individual bonds by more than 70%. Compared to diversified portfolios of senior bonds, diversified portfolios of covered bonds have a significantly lower level of systematic risk. However, the fraction of systematic risk to total risk is higher for covered bonds. By decomposing the variance of bond returns, we find that around 33% of the risk in senior bonds is systematic, versus 53% in covered bonds. Both types of bonds contain instrument-specific risk.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:fmktpm:v:34:y:2020:i:1:d:10.1007_s11408-019-00343-2
    DOI: 10.1007/s11408-019-00343-2
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    Cited by:

    1. Azra Zaimovic & Adna Omanovic & Almira Arnaut-Berilo, 2021. "How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature," JRFM, MDPI, vol. 14(11), pages 1-30, November.

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    More about this item

    Keywords

    Covered bonds; Senior bonds; Systematic risk; Unsystematic risk; Instrument-specific risk;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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