Sovereign spreads in the eurozone: which prospects for a Eurobond?

Asset pricing with liquidity risk

Carlo Favero () and Alessandro Missale

Economic Policy, 2012, vol. 27, issue 70, 231-273

Abstract: In this paper, we provide new evidence on the determinants of sovereign yield spreads and ‘market sentiment’ effects in the eurozone in order to evaluate the rationale for a common Eurobond jointly guaranteed by eurozone Member States. We find that default risk is the main driver of yield spreads, suggesting small gains from greater liquidity. Fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries’ yield spreads; that is, with the global risk that the market perceives. More importantly, the impact of this global risk variable is not constant over time, a clear sign of contagion driven by shifts in market sentiment. This evidence points to a discontinuity in the disciplinary role of financial markets. If markets can stay irrational longer than a country can stay solvent, then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened, and issuing Eurobonds can be economically justified.— Carlo Favero and Alessandro Missale

Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (89)

Downloads: (external link)
http://hdl.handle.net/10.1111/j.1468-0327.2012.00282.x (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:27:y:2012:i:70:p:231-273.

Access Statistics for this article

Economic Policy is currently edited by Ghazala Azmat, Roberto Galbiati, Isabelle Mejean and Moritz Schularick

More articles in Economic Policy from CEPR, CESifo, Sciences Po Contact information at EDIRC., CES Contact information at EDIRC., MSH Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().