The pricing of G7 sovereign bond spreads – the times, they are a-changin

Antonello D'Agostino and Michael Ehrmann

MPRA Paper from University Library of Munich, Germany

Abstract: Against the background of the current debate about fiscal sustainability in several advanced economies, this paper estimates the determinants of sovereign bond spreads of the G7 countries, using high-frequency proxies for market expectations about macroeconomic fundamentals. It allows for time-varying parameters and stochastic volatility as well as for asymmetry in the effects of countries’ fundamentals on yield spreads. The paper finds that there is substantial asymmetry in the importance of country fundamentals, which shrinks, the closer the two constituent bonds are to being substitutes. There are also considerable time variations in the role of the various determinants. In particular, there has been a reduced pricing of several risk factors in the years preceding the financial crisis, and either an over-pricing of risk or the pricing of catastrophic events like a break-up of the euro area and a re-denomination risk of euro area bonds during the European sovereign debt crisis.

Keywords: sovereign spreads; fiscal policy; time-varying coefficients (search for similar items in EconPapers)
JEL-codes: E43 E44 F34 G15 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: The pricing of G7 sovereign bond spreads – The times, they are a-changin (2014)
Working Paper: The pricing of G7 sovereign bond spreads: the times, they are a-changin (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:40604

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