Flight Patterns and Yields of European Government Bonds

Gregor von Schweinitz

No 10/2013, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: The current European Debt Crisis has led to a reinforced effort to identify the sources of risk and their influence on yields of European Government Bonds. Until now, the potentially nonlinear influence and the theoretical need for interactions reflecting flighttoquality and flight-to-liquidity has been widely disregarded. I estimate government bond yields of the Euro-12 countries without Luxembourg from May 2003 until December 2011. Using penalized spline regression, I find that the effect of most explanatory variables is highly nonlinear. These nonlinearities, together with flight patterns of flighttoquality and flight-to-liquidity, can explain the co-movement of bond yields until September 2008 and the huge amount of differentiation during the financial and the European debt crisis without the unnecessary assumption of a structural break. The main effects are credit risk and flight-to-liquidity, while the evidence for the existence of flight-to-quality and liquidity risk (the latter measured by the bid-ask spread and total turnover of bonds) is comparably weak.

Keywords: sovereign bonds; sovereign risk premiums; sovereign debt crisis; semiparametric regression (search for similar items in EconPapers)
JEL-codes: C14 G01 G12 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-10-13

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