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Towards a Common European Monetary Union Risk Free Rate

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

No 15353, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A common European bond would yield a common European Monetary Union risk free rate. We present tentative estimates of this common risk free for the European Monetary Union countries from 2004 to 2009 using variables motivated by a theoretical portfolio selection model. First, we analyze the determinants of EMU sovereign yield spreads and find significant effects of the credit quality, macro, correlation, and liquidity variables. However, their effects are different before and after the current financial crisis, being stronger in the latter period. Robustness tests with different data frequencies, benchmarks, liquidity variables, cross section regressions and balanced panels confirm the initial results. We propose four different estimates of the common risk free rate and show that, in most cases, this common rate could imply savings in borrowing costs for all the countries involved.

JEL-codes: E43 E44 G15 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
Note: AP IFM
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Working Paper: Towards a common European Monetary Union risk free rate (2011) Downloads
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