Kiel Working Papers, Kiel Institute for World Economics
No 1548:
Determinants of government bond spreads in the Euro area – in good times as in bad
Christian Aßmann and Jens Hogrefe
Abstract: Despite the single currency, yields on government bonds in
the Euro Area deviate from German bond yields. These bond spreads are
usually attributed to differing default and liquidity risks. Recent
research points out that time-varying global factors, approximated by risk
measures or short term interest rates, play an important role for the
evaluation of theses risks. In this paper, instead of proxy variables
latent processes are assumed to model the aforementioned time variation. We
find, that default risks measured via expected debt-to-GDP ratio explain a
good stake of the variation of bond spreads in the Euro area at least
between 2003 and the take-off of the financial crisis. During the financial
crisis default risks or rather their evaluation increased but lost relative
importance compared to liquidity risks
Keywords: Euro Area; bond spreads; time-varying coefficients; liquidity risk; default risk; (follow links to similar papers)
JEL-Codes: C32,; G12,; E43,; E62; (follow links to similar papers)
16 pages, September 2009
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