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Determinants of intra-euro area government bond spreads during the financial crisis

Salvador Barrios (salvadorbarrios@gmail.com), Per Iversen, Magdalena Lewandowska and Ralph Setzer

No 388, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: This paper provides an empirical analysis of the determinants of government bond yield spreads in the euro area with a focus on developments during the global financial crisis that started in 2007. In line with the previous literature, we find that international factors, in particular general risk perception, play a major role in explaining governments bond yields differentials. While domestic factors such as liquidity and sovereign risk appear to be smaller but non-negligible drivers of yield spreads our results point to significant interaction of general risk aversion and macroeconomic fundamentals. Moreover, the impact of domestic factors on bond yield spreads increase significantly during the crisis, when international investors started to discriminate more between countries. In particular, the combination of high risk aversion and large current account deficits tend to magnify the incidence of deteriorated public finances on government bond yield spreads. Overall, our results suggest that an improvement in global risk perception will lead to a narrowing of intra-euro area bond yield differentials. However, the differing impact of the crisis on Member States' public finances and the expected higher risk awareness of investors after the crisis could keep government bond yield spreads at a higher level then in the pre-crisis period.

Keywords: sovereign bond; intra-euro area government bond spreads; spread determinants; financial crisis Barrios; Iversen; Lewandowska; Setzer (search for similar items in EconPapers)
JEL-codes: E44 F36 G12 G15 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2009-11
New Economics Papers: this item is included in nep-ban, nep-eec, nep-ifn, nep-mac and nep-upt
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Citations: View citations in EconPapers (199)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0388

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