3 Issuing costs of state guaranteed bonds - Financial Risk and ...

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3 Issuing costs of state guaranteed bonds Liquidity and interest rate risk LIQUIDi, captures the liquidity risk of a security. Liquidity risk is lower among securities that can be traded more quickly and easily than other securities because these attributes reduce the likelihood of incurring losses or failing to realise profits. Liquidity risk is proxied by issuance volume in that larger issues may be more widely held and traded than smaller issues. FIXEDi, captures interest rate risk associated with fixed versus floating rate bonds. If a bond provides fixed interest rate payments the variable is set to 1 and if it provides variable interest rate payments it is set to 0. As floating rate bonds are associated with a more uncertain stream of payments, credit risk and issuing costs are likely to be higher for floating rate bonds, all else equal. Bond clauses The expected sign of the impact of other bond terms and conditions, such as the presence of a cross-default clause, a negative pledge clause and a force majeure clause on issuing cost are as follows. A cross default clause puts the issuing bank in default if it defaults on another loan obligation. This provides more security to investors and is therefore associated with lower credit risk and a lower issuing cost. A negative pledge clause indicates that the issuer will not pledge any of its assets if doing so provides the investor less security. It is therefore associated with lower credit risk and a lower issuing cost. And, a force majeure clause removes liability on the part of the issuer in the case of unavoidable events and is therefore associated with higher credit risk and a higher issuing cost. Primary market efficiency Primary market efficiency is proxied by the variable PRIVATEi, which indicates whether the SG/non-SG bond is privately or publicly placed. A private placement is a non-underwritten, unregistered bond sold directly to a single investor or a small group of investors. A priori, it is unclear as to whether a private placement is associated with a lower issuing cost. A private placement may be associated with a lower issuing cost if private investor(s) believe credit risk to be lower than public investors. An alternative hypothesis is that private investor(s) may be more active, bringing about a lower level of credit risk and issuing cost than public investors. On the other hand, the management of the issuing bank may be able to place the issue with private investors with whom it had a long relationship, resulting possibly in laxer monitoring and higher credit risk than would have been the case if public investors had taken up the bond issue. Systematic characteristics Finally, systematic characteristics may influence issuing cost. The currency denomination of the issue, USDi/EURi, may increase issuing cost if the currency is viewed to be more risky. The market conditions at the time of issue, Ti, are likely to be associated with a higher issuing cost if they were poorer. 38
3 Issuing costs of state guaranteed bonds And, the more volatile the market place at the time of issue, VOLi, the higher the issuing cost. Volatility is captured by the VSTOXX index that provides a key measure of market expectations of near-term up to long-term volatility based on the volatility of the EURO STOXX 50 options prices. The index covers Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. 39
Page 2 and 3: Economic Papers are written by the
Page 4 and 5: Wherever possible London Economics
Page 6 and 7: Contents Page Annex 4 Results of di
Page 8 and 9: Tables, Figures & boxes Page Table
Page 10 and 11: Glossary vi Glossary BGN Bloomberg
Page 12 and 13: Executive summary Member States (Cy
Page 14 and 15: 1 Introduction 1 Introduction 1.1
Page 16 and 17: 1 Introduction 1.4 Research questi
Page 18 and 19: 1 Introduction analysis of the lat
Page 20 and 21: 2 Overview of state guarantee sche
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4 Impact of state guaranteed bonds
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5 Key empirical findings and polic
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References Acharya V.V. and Sundara
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Lando, D. (1997). 'Modeling Bonds a
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Annex 1 Eligibility criteria for st
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Annex 2 Comparison of SG and non-SG
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Annex 2 Comparison of SG and non-SG
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Annex 3 Analysis of missing issuin
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Annex 3 Analysis of missing issuing
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Annex 3 Analysis of missing issuing
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Annex 4 of diagnostic tests of issu
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Annex 4 of issuing cost model Figur
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Annex 5 -over model Annex 5 Results
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Annex 5 -over model Figure 25: Anal
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Annex 6 Availability of bank data A
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Annex 6 Availability of bank data T
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Annex 7 Linking Bloomberg and Banks
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Annex 8 Investigation of estimation
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