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

3 Issuing costs of state guaranteed bonds
capturing the impact of state guarantees on issuing cost but with the addition of variables relating
to issuing intensity.
ISSUING COSTit 1 SG ISSUING INTENSITYim 2 NON-SG ISSUING INTENSITYm 3
GUARANTEEi 4 RATINGi 5 MATURITYit 6 SOVit 7 LIQUIDi 8 PRIVATEi 9 VOLit
i i it
(5)
For each bond issue, i, at issue date, t, in issuing month, m:
70
ISSUING COSTit is the issuing cost of the bond at issue
SG ISSUING INTENSITYim is the total volume of SG bonds issued in the month of issue of
the bond
NON-SG ISSUING INTENSITYim is the total volume of non-SG bonds issued in the month of
issue of the bond
GUARANTEEi is an indicator for whether the bond is state guaranteed or not
RATINGi is an indicator for whether the bond was AAA-rated or otherwise
MATURITYit is the time to maturity at issue of the bond
SOVi is the sovereign CDS rate for the country of risk of the bond
LIQUIDi is the amount issued of the bond
PRIVATEi is an indicator for whether the bond was privately placed or otherwise
VOLit is the value of VSTOXX Index in the month of issue of the bond
i is a vector of dummies for whether the currency-denomination of the bond is
USD- or EUR-denominated
i is a vector of dummies for whether the interest rate type of the bond is fixed or
floating
it is an observation-specific
error term.
3.6.2 Average impact
Table 10 shows evidence that there was a small but statistically significant indirect effect of SG
bonds. The larger the aggregate volume of SG bonds issued, the higher the issuing costs faced by
banks. This is likely to be due to supply and demand effects insofar as the greater the demand for
investor funds, the higher the level of credit spreads investors require in order to take-up any
particular bond issue, all else equal. Table 10 shows that for each additional €1bn of SG bonds
issued in a given month, the magnitude of this indirect effect is in the region of increasing issuing
costs by 0.04bps.