Several proposals for the reform of the euro area advocate the creation of a market in synthetic securities backed by portfolios of sovereign bonds. Most debated are the so-called European Safe Bonds or ESBies proposed by (Brunnermeieret al. 2017). This paper provides a comprehensive quantitative analysis of such products. A key component of our contribution is a novel dynamic credit risk model which captures salient features of euro area sovereign CDS spreads and enables tractable modelling of default dependence amongst euro members. After successful calibration of our model to CDS spreads, we perform a thorough analysis of ESBies. We provide model-independent price bounds; we consider the expected loss as a function of model parameters and attachment points ; we study the volatility of the credit spread of ESBies ; and we discuss several approaches to assess the market risk of ESBies. Our analysis provides a fairly comprehensive picture of the risks associated with ESBies .
Several proposals for the reform of the euro area advocate the creation of a market in synthetic securities backed by portfolios of sovereign bonds. Most debated are the so-called European Safe Bonds or ESBies proposed by Brunnermeier, Langfield, Pagano,Reis, Van Nieuwerburgh and Vayanos ( 2017). The potential benefits of ESBies and other bond-backed securities hinge on the assertion that these products are really safe. In this paper we provide a comprehensive quantitative study of the risks associated with ESBies and related products, using an affine credit risk model with regime switching as vehicle for our analysis. We discuss a recent proposal of Standard and Poors for the rating of ESBies, we analyse the impact of model parameters and attachment points on the size and the volatility of the credit spread of ESBies and we consider several approaches to assess the market risk of ESBies. Moreover, we compare ESBies to synthetic securities created by pooling the senior tranche of national bonds as suggested by Leandro and Zettelmeyer(2019). The paper concludes with a brief discussion of the policy implications from our analysis .
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Brunnermeier, Langfield, Pagano,Reis, Van Nieuwerburgh and Vayanos (
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This paper provides
The potential benefits of ESBies and other bond-backed securities hinge on the assertion that these products are really safe. In this paper we provide
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analysis of such products. A key component of our contribution is a novel dynamic
study of the risks associated with ESBies and related products, using an affine
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which captures salient features of euro area sovereign CDS spreads and enables tractable modelling of default dependence amongst euro members. After successful calibration of our model to CDS spreads, we perform a thorough analysis of ESBies. We provide model-independent price bounds; we consider the expected loss as a function
with regime switching as vehicle for our analysis. We discuss a recent proposal of Standard and Poors for the rating of ESBies, we analyse the impact
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; we study the
on the size and the
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; and we discuss
and we consider
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Our analysis provides a fairly comprehensive picture of the risks associated with ESBies
Moreover, we compare ESBies to synthetic securities created by pooling the senior tranche of national bonds as suggested by Leandro and Zettelmeyer(2019). The paper concludes with a brief discussion of the policy implications from our analysis