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Sovereign bond spread drivers in the EU market in the aftermath of the global financial crisis

Iuliana Matei and Angela Cheptea

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European government bond market. But, what are the main drivers of this "perfect storm" that since 2009 affects EU government bond market as well? To answer this question, we propose an empirical study of the determinants of the sovereign bond spreads of EU countries with respect to Germany during the period 2003-2010. Technically, we address two main questions. First, we ask what share of the change in sovereign bond spreads is explained by changes in the fundamentals, liquidity and market risks. Second, we distinguish between EU member states within and outside the Euro area and question whether long-term determinants of spreads affect EU members uniformly. To these ends, we employ panel data techniques in a regression model where spreads to Germany (with virtually no default risk) are explained by set of traditional variables and a number of policy variables. Results reveal that large fiscal deficits and public debt as well as political risks and to a lesser extent the liquidity are likely to put substantial upward pressures on sovereign bond yields in many advanced European economies.

Keywords: Debt; Euro zone crisis; financial contagion; panel models (search for similar items in EconPapers)
Date: 2013-07-17
New Economics Papers: this item is included in nep-fmk
Note: View the original document on HAL open archive server: https://hal.science/hal-00845660
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Citations: View citations in EconPapers (2)

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Working Paper: Sovereign bond spread drivers in the EU market in the aftermath of the global financial crisis (2013) Downloads
Chapter: Sovereign Bond Spread Drivers in the EU Market in the Aftermath of the Global Financial Crisis (2012) Downloads
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