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Financial Markets and Portfolio Management

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01.05.2014

On the distribution of government bond returns: evidence from the EMU

verfasst von: Christian Gabriel, Christian Lau

Erschienen in: Financial Markets and Portfolio Management | Ausgabe 2/2014

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Abstract

This paper assesses the statistical distribution of daily EMU bond returns for the period 1999–2012. The normality assumption is tested and clearly rejected for all European countries and maturities. Although skewness plays a minor role in this departure from normality, it is mainly due to the excess kurtosis of bond returns. Therefore, we test the Student’s t, skewed Student’s t, and stable distribution that exhibit this feature. The financial crisis leads to a structural break in the time series. We account for this and retest the alternative distributions. A value-at-risk application underlines the importance of our findings for investors. In sum, excess kurtosis in bond returns is essential for risk management, and the stable distribution captures this feature best.

Vorheriger Artikel An international analysis of REITs and stock portfolio management based on dynamic conditional correlation models

Nächster Artikel Alan S. Blinder: After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead

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We thank an anonymous referee for highlighting this fact.

It is important to note that our analysis is based on unconditional distributions. GARCH-type models (see Bollerslev 1986) are beyond the scope of the present paper.

Rachev et al. (2003) fit the stable distribution to US corporate bond indices. Interest rate risk, measured with duration, and credit default risk are the main risk-driving factors of bonds. Using indices leads to a clustering of duration and rating, resulting in a less than clear view of the bonds’ risk.

The time series for Belgium and Greece start in 2001, resulting in 3,150 data points.

We subtract 2 days for a public holiday and 3 days for a weekend.

The new phenomenon of sovereign risk in European government bonds is important for interpreting the variation of returns (see Gomez-Puig 2009; Bernoth et al. 2004; Sgherri and Zoli 2009). We calculate the average spread of 10-year bonds for each country over 10-year German bonds, which we assume to be the reference.

Due to the imminent default of Greece, results for Greek bonds are more extreme throughout the study. For the sake of readability, we document the results for Greece only if they provide new insight.

We decide against a more general formulation of the Student’s \(t\) distribution that allows more extreme values of the tail parameter and the nonexistence of the first moment as using such a formulation would imply that the parameters are no longer comparable to the parameters of the skewed Student’s t distribution.

We first standardize the data for the estimation of the Student’s t and skewed Student’s t distribution.

In this case, we refrain from giving critical values and test statistics.

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Titel: On the distribution of government bond returns: evidence from the EMU
verfasst von: Christian Gabriel
Christian Lau
Publikationsdatum: 01.05.2014
Verlag: Springer US
Erschienen in: Financial Markets and Portfolio Management / Ausgabe 2/2014
Print ISSN: 1934-4554
Elektronische ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-014-0228-y

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