Working Paper

The Safety Premium of Safe Assets

Abstract: Safe assets usually trade at a premium due to their high credit quality and deep liquidity. To understand the role of credit quality for such premia, we focus on Swiss Confederation bonds, which are extremely safe but not particularly liquid. We therefore refer to their premia as safety premia and quantify them using an arbitrage-free term structure model that accounts for time-varying premia in individual bond prices. The estimation results show that Swiss safety premia are large and exhibit long-lasting trends. Furthermore, our regression analysis suggests that they shifted upwards persistently following the launch of the euro but have been depressed in recent years by the asset purchases of the European Central Bank.

Keywords: affine arbitrage-free term structure model; bond-specific risk premia; euro launch; negative interest rates;

JEL Classification: C32; E43; E52; F34; G12;

https://doi.org/10.24148/wp2019-28

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2021-02-02

Number: 2019-28

Note: The first version of this Working Paper was published on November 25, 2019.