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Determinants of sovereign yield spreads in the Eurozone: A Bayesian approach

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  • Maltritz, Dominik
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    Abstract

    We analyze the determinants of sovereign yields spreads of EMU member states applying Bayesian Model Averaging (BMA) to annual panel data from 1999 to 2009. BMA is well-suited in cases of small samples and high model uncertainty. This seems to be the case in modeling sovereign yield spreads in the Eurozone since the literature reports heterogeneous results with respect to significant explanatory variables. We are testing a number of variables reported to be significant in the literature and find that the most likely country specific drivers of yield spreads are fiscal variables such as budget balance and government debt, as well as external sector variables, such as terms of trade, trade balance and openness. Global financing conditions, indicated by the US interest rate, and market sentiments, indicated by corporate bond spreads, are likely to influence sovereign yield spreads.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 31 (2012)
    Issue (Month): 3 ()
    Pages: 657-672

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    Handle: RePEc:eee:jimfin:v:31:y:2012:i:3:p:657-672

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: E43; G12; H63; E62; Sovereign bond yield spreads; Default risk in EMU countries; Bayesian Model Averaging;

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    Cited by:
    1. Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi, 2014. "Measuring the eff ect of government ESG performance on sovereign borrowing cost," Working Papers hal-00951304, HAL.
    2. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2013. "Fiscal space and sovereign risk pricing in a currency union," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 131-163.
    3. Sottile, Pedro, 2013. "On the political determinants of sovereign risk: Evidence from a Markov-switching vector autoregressive model for Argentina," Emerging Markets Review, Elsevier, vol. 15(C), pages 160-185.
    4. Ludwig, Alexander, 2013. "Sovereign risk contagion in the Eurozone: A time-varying coefficient approach," Dresden Discussion Paper Series in Economics 02/13, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
    5. Maltritz, Dominik & Molchanov, Alexander, 2014. "Country credit risk determinants with model uncertainty," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 224-234.
    6. Comelli, Fabio, 2012. "Emerging market sovereign bond spreads: Estimation and back-testing," Emerging Markets Review, Elsevier, vol. 13(4), pages 598-625.
    7. Linciano Nadia & Giordano Luca & Soccorso Paola, 2013. "Sovereign risk premia in the Euro Area and the role of contagion," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 66-70, January.

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