The maturity of sovereign debt issuance in the Euro area
Beetsma,R.M.W.J. Giuliodori,M. Hanson,J. de Jong,Frank
Beetsma,R.M.W.J.
Giuliodori,M.
Hanson,J.
de Jong,Frank
Abstract
We use information on new sovereign debt issues in the euro area to explore the drivers behind the debt maturity decisions of governments. We set up a theoretical model for the maturity structure that trades off the preference for liquidity services provided by short-term debt, roll-over risk and price risk. The average debt maturity is negatively related to both the level and the slope of the yield curve. A panel VAR analysis shows that positive shocks to risk aversion, the probability of non-repayment and the demand for the liquidity services of short-term debt all have a positive effect on the yield curve level and slope, and a negative effect on the average maturity of new debt issues. These results are partially in line with our theoretical framework. A forecast error variance decomposition suggests that changes in the probability of non-repayment as captured by the expected default frequency extracted from credit default spreads are the most important source of shocks.
Description
Date
2021-02
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Publisher
Research Projects
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Keywords
maturity, euro-area public debt auctions, yield curve, liquidity services of short debt, risk aversion, expected repayment probability, G11 - Portfolio Choice ; Investment Decisions, G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates, G18 - Government Policy and Regulation, E62 - Fiscal Policy ; Modern Monetary Theory
Citation
Beetsma, R M W J, Giuliodori, M, Hanson, J & de Jong, F 2021, 'The maturity of sovereign debt issuance in the Euro area', Journal of International Money and Finance, vol. 110, 102293. https://doi.org/10.1016/j.jimonfin.2020.102293