J. Risk Financial Manag., Volume 12, Issue 2 (June 2019) – 56 articles
Cover Story (view full-size image):
Liquidity benefits of a European sovereign bond-backed securitization are assessed. This is done by measuring the effectiveness of hedging by market makers to cover positions in individual euro area sovereign bonds using tranches of the proposed securitization. Optimal hedging reduces risk exposures substantially in normal market conditions. In volatile conditions, hedging is not so effective, but doing so leaves dealers exposed to mostly idiosyncratic risks. These risks largely disappear when diversified across country-specific secondary markets and tranches. Hedging long positions in a portfolio of individual sovereigns results in risk exposure as low as holding the safest sovereign bond (the Bund). View this paper.
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