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Government bond risk premiums in the EU revisited: The impact of the financial crisis

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  • von Hagen, Jürgen
  • Schuknecht, Ludger
  • Wolswijk, Guido

Abstract

This article looks at US$ and DM/Euro-denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads during the crisis can largely be explained on the basis of the same variables as before the crisis. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 27 (2011)
Issue (Month): 1 (March)
Pages: 36-43

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Handle: RePEc:eee:poleco:v:27:y:2011:i:1:p:36-43

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Web page: http://www.elsevier.com/locate/inca/505544

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Keywords: Sovereign risk premiums Bond markets Financial crisis;

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  1. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 24, pages 191-240, 04.
  2. David Haugh & Patrice Ollivaud & David Turner, 2009. "What Drives Sovereign Risk Premiums?: An Analysis of Recent Evidence from the Euro Area," OECD Economics Department Working Papers 718, OECD Publishing.
  3. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government risk premiums in the bond market: EMU and Canada," European Journal of Political Economy, Elsevier, Elsevier, vol. 25(3), pages 371-384, September.
  4. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004. "Sovereign risk premia in the European government bond market," Working Paper Series, European Central Bank 0369, European Central Bank.
  5. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 388, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. Ashoka Mody, 2009. "From Bear Stearns to Anglo Irish," IMF Working Papers 09/108, International Monetary Fund.
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