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

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  • Maltritz, Dominik

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.

Suggested Citation

  • Maltritz, Dominik, 2012. "Determinants of sovereign yield spreads in the Eurozone: A Bayesian approach," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 657-672.
    • Handle: RePEc:eee:jimfin:v:31:y:2012:i:3:p:657-672
    DOI: 10.1016/j.jimonfin.2011.10.010
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    More about this item

    Keywords

    E43; G12; H63; E62; Sovereign bond yield spreads; Default risk in EMU countries; Bayesian Model Averaging;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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