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Towards a common European Monetary Union risk free rate

Sergio Mayordomo (), Juan Ignacio Peña and Eduardo S. Schwartz

No CNMV Working Papers no. 51. 2011, CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

Abstract: CONTENTS: This paper presents an estimation of the interest rate of a hypothetical common bond for the European Monetary Union (EMU) countries. This estimation is done using a series of variables which are motivated by a theoretical portfolio selection model for the period 2004-2010. In a first stage, the paper analyses the determinants of EMU sovereign yield spreads and finds significant ef­fects of variables related to credit quality factors, the macroeconomic situation, and other factors indicative of the correlation between the sovereign yield spreads and the bonds liquidity. On the basis of the determinants of the yield spreads, the hypothetical common risk free rate is estimated. This common rate would imply on average for the period under study savings in borrowing costs for all the EMU coun­tries although under extreme market circumstances, some countries may suffer increased borrowing costs.

Keywords: Euro government bonds; Credit quality; Liquidity; Macro factors (search for similar items in EconPapers)
JEL-codes: F33 G12 H63 (search for similar items in EconPapers)
Date: 2011
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