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European Fixed Income Markets
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Wiley Finance SeriesInflation-Indexed Securities: Bonds, Swaps and Other Derivatives, 2nd EditionMark Deacon, Andrew Derry and Dariush MirfendereskiEuropean Fixed Income Markets: Money, Bond and Interest RatesJonathan Batten, Thomas Fetherston and Peter Szilagyi (Editors)Global Securitisation and CDOsJohn DeaconApplied Quantitative Methods for Trading and InvestmentChristian L. Dunis, Jason Laws and Patrick Na¨ım (Editors)Country Risk Assessment: A Guide to Global Investment StrategyMichel Henry Bouchet, Ephraim Clark and Bertrand GroslambertCredit Derivatives Pricing Models: Models, Pricing and ImplementationPhilipp J. Scho¨nbucherHedge Funds: A Resource for InvestorsSimone BorlaA Foreign Exchange PrimerShani ShamahThe Simple Rules: Revisiting the Art of Financial Risk ManagementErik BanksOption TheoryPeter JamesRisk-adjusted Lending ConditionsWerner RosenbergerMeasuring Market RiskKevin DowdAn Introduction to Market Risk ManagementKevin DowdBehavioural FinanceJames MontierAsset Management: Equities DemystifiedShanta AcharyaAn Introduction to Capital Markets: Products, Strategies, ParticipantsAndrew M. ChisholmHedge Funds: Myths and LimitsFrancois-Serge LhabitantThe Manager’s Concise Guide to RiskJihad S. NaderSecurities Operations: A Guide to Trade and Position ManagementMichael SimmonsModeling, Measuring and Hedging Operational RiskMarcelo CruzMonte Carlo Methods in FinancePeter Ja¨ckelBuilding and Using Dynamic Interest Rate ModelsKen Kortanek and Vladimir MedvedevStructured Equity Derivatives: The Definitive Guide to Exotic Options and Structured NotesHarry KatAdvanced Modelling in Finance Using Excel and VBAMary Jackson and Mike StauntonOperational Risk: Measurement and ModellingJack KingInterest Rate ModellingJessica James and Nick Webber
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European Fixed Income MarketsMoney, Bond, and Interest Rate DerivativesJonathan A. BattenThomas A. FetherstonandPeter G. Szilagyi
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Copyright ⃝C 2004 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,West Sussex PO19 8SQ, EnglandTelephone (+44) 1243 779777Email (for orders and customer service enquiries): [emailprotected]Visit our Home Page on www.wileyeurope.com or www.wiley.comAll Rights Reserved. No part of this publication may be reproduced, stored in a retrieval systemor transmitted in any form or by any means, electronic, mechanical, photocopying, recording,scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 TottenhamCourt Road, London W1T 4LP, UK, without the permission in writing of the Publisher.Requests to the Publisher should be addressed to the Permissions Department, John Wiley &Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailedto [emailprotected], or faxed to (+44) 1243 770620.This publication is designed to provide accurate and authoritative information in regard tothe subject matter covered. It is sold on the understanding that the Publisher is not engagedin rendering professional services. If professional advice or other expert assistance isrequired, the services of a competent professional should be sought.Other Wiley Editorial OfficesJohn Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USAJossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USAWiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, GermanyJohn Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, AustraliaJohn Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobico*ke, Ontario, Canada M9W 1L1Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books.Library of Congress Cataloging-in-Publication DataEuropean fixed income markets : money, bond, and interest ratederivatives / [edited by] Jonathan A. Batten, Thomas A. Fetherston,Peter G. Szilagyi.p. cm. – (Wiley finance series)Includes bibliographical references and index.ISBN 0-470-85053-1 (alk. paper)1. Capital market–Europe. 2. Capital market–European Unioncountries. 3. Fixed-income securities–Europe. 4. Fixed-incomesecurities–European Union countries. I. Batten, Jonathan. II. Fetherston, Thomas A.III. Szilagyi, Peter G., 1976– IV. Series.HG5422 .E9844 2003′ ′332 .041 094–dc222003021224British Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryISBN 0-470-85053-1Typeset in 10/12pt Times by TechBooks, New Delhi, IndiaPrinted and bound in Great Britain by Antony Rowe Ltd, Chippenham, WiltshireThis book is printed on acid-free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper production.
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Anya´nak szeretettel, Laci e´s Peti
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ContentsSECTION I PERSPECTIVE ON EUROPEAN FIXED INCOMEAND DERIVATIVE MARKETS 11 Introduction to the Volume 3Jonathan A. Batten, Thomas A. Fetherston, and Peter G. Szilagyi1.1 Overview 31.2 Chapter overview 8References 262 The Euro Area Bond Market: Integration and Development UnderMonetary Union 27Peter G. Szilagyi2.1 Introduction 272.2 Theoretical underpinnings of financial integration 282.3 Bond market development under monetary union 312.4 Proposals and initiatives for reducing market fragmentation 492.5 Conclusion 50References 513 Perspective on the Emerging European Financial Markets 53Peter G. Szilagyi, Thomas A. Fetherston, and Jonathan A. Batten3.1 Introduction 533.2 Financial structures in emerging Europe 543.3 International bank borrowing 563.4 International debt issues 583.5 Domestic debt issues 593.6 Conclusion 64References 65
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viii Contents4 Perspectives on European Derivative Markets 67Martin Young4.1 Introduction and a brief history of the European derivative markets 674.2 Europe’s major derivative markets 684.3 An overview of the contracts traded on EUREX and Euronext.Liffe 754.4 Europe’s other derivative markets 804.5 What the future holds 835 Benchmark Yield Curves in the Euro Market 85Philip D. Wooldridge5.1 Introduction 855.2 Characteristics of benchmark yield curves 855.3 Benchmark tipping in European bond markets 865.4 Government securities as benchmarks 895.5 Interest rate swaps compete for benchmark status 905.6 Prospects for other nongovernment benchmarks 93References 946 Some Facts on Pfandbrief Products in Europe 97Orazio Mastroeni6.1 Introduction 976.2 Covered bonds, Pfandbrief products, and securitization 996.3 The German traditional and jumbo Pfandbrief markets 1056.4 The French “Obligations Foncie˙res” 1106.5 The Spanish “Cedulas Hipotecarias” 1106.6 The Luxembourg “Lettres de Gage” 1116.7 Common aspects of Pfandbriefe products 1126.8 Aspects characterizing the “quality” of Pfandbrief products 1226.9 Conclusions and prospects 127References 128SECTION II COUNTRY STUDIES 1317 Austria 133Vanessa Seconnino and Alham Yusuf7.1 Introduction 1337.2 Regulation 1337.3 Credit ratings 1377.4 Taxation 1377.5 Austrian Stock Exchange (Wiener Bo¨rse) 1387.6 The Austrian bond market 1397.7 Conclusion 149References 149
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Contents ix8 Belgium 151Jan Annaert and Marc J.K. De Ceuster8.1 Introduction 1518.2 History and structure of the Belgian public debt 1518.3 Government bonds 1538.4 Corporate bonds 1618.5 Derivative products 163References 1649 Czech Republic 167Guan-Chye Ooi and Jonathan A. Batten9.1 Introduction 1679.2 Financial market regulation 1699.3 Financial market participants 1719.4 Money and fixed income instruments 1749.5 Conclusion 179References 17910 Denmark 181Charlotte Christiansen, Tom Engsted, Svend Jakobsen, and Carsten Tanggaard10.1 Introduction 18110.2 History and structure of the Danish bond market 18310.3 The Danish government bond market 18410.4 The market for Danish mortgage-backed securities 18610.5 Other fixed income instruments 19110.6 Market participants, regulation, and trading 193References 19611 An Empirical Study of the Term Structure of Interest Ratesin Denmark (1993–2002) 199Charlotte Christiansen, Tom Engsted, Svend Jakobsen, and Carsten Tanggaard11.1 Introduction 19911.2 The EHTS and its testable implications 20011.3 Empirical results for Denmark (1993–2002) 20211.4 Concluding remarks 208References 20812 Finland, Iceland, Norway, and Sweden 211Seppo Pynno¨nen12.1 Introduction 21112.2 Structure of the markets 21412.3 Finland 21712.4 Iceland 221
