Empirical studies on sovereign fixed income markets Defended on Friday, 20 November 2015

This dissertation presents evidence of five studies showing that sovereign fixed income markets are not always price efficient.

The emerging local currency debt market has grown to a large size of more than 1.5 trillion US Dollars at the end of 2012. The factors that can predict developed market government bond returns can also predict emerging market government bond returns. Changes in an adapted Merton model for government bonds can predict emerging market country credit default swap returns.

The euro crisis has highlighted the importance of political risk in government bond markets. Changes in political risk can predict future government bond returns. Market participants should avoid bond markets with higher political risk and rather invest in bond markets with lower political risk. Government bond returns are 3.8 percentage points higher in the second half of the calendar year than in the first half of the calendar year. This seasonal pattern is largely explained by an opposite pattern in not seasonally adjusted U.S. inflation which is 3.0 percentage points lower in the second half of the calendar year.

The swaption market has become the largest non-cleared interest rate derivative market with a (notional) size of 30 trillion USD as of April 2014. Although swaption models are different from equity options models, the swaption market contains volatility risk and jump risk premiums consistent with equity options. Combining the two risk premiums in a “riding the swaption curve” strategy provides a strong diversification.

Keywords

Market timing, Emerging debt, Government bonds, Political risk, Sovereign credit risk, Structural model, Seasonality, Inflation, Inflation linked bonds, Volatility risk premium, Term structure, Swaption, Interest rate derivatives