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Measuring Systematic Risk in EMU Government Yield Spreads

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Author Info
Alois Geyer
Stephan Kossmeier
Stefan Pichler

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Abstract

This paper focuses on the joint dynamics of yield spreads derived from government bonds issued by member states of the European Monetary Union (EMU). A descriptive analysis shows that there are substantial and volatile spreads between zero coupon yields of EMU member countries and German Bund yields. These yield spreads form an important source of additional risk that has to be taken into account by any pricing or risk management model dealing with EMU government bonds. We extract risk factors driving observed yield spreads by employing a multi-issuer version of the model originally proposed by Duffie and Singleton (1999). We adopt a state-space approach to implement the model whereby we can extract factor series and model parameters simultaneously. Our findings indicate that a parsimonious two-factor version of the multi-issuer model sufficiently captures the main features of the data. In this model the first factor turns out to be related to long term yield spreads across different issuers, whereas the second factor is related to short term yield spreads. Our evidence suggests that EMU government bond spreads are related to corporate bond spreads and swap spreads whereas we do not find evidence for a significant impact of macroeconomic or liquidity related variables.

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Publisher Info
Article provided by Springer in its journal European Finance Review.

Volume (Year): 8 (2004)
Issue (Month): 2 ()
Pages: 171-197
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Handle: RePEc:kap:eurfin:v:8:y:2004:i:2:p:171-197

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Web page: http://springerlink.metapress.com/link.asp?id=111870

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  1. Tullio Jappelli & Marco Pagano, 2008. "Financial Market Integration Under EMU," CSEF Working Papers 197, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  2. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2007. "How Sovereign is Sovereign Credit Risk?," NBER Working Papers 13658, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Marco Pagano & Ernst-Ludwig von Thadden, 2004. "The European Bond Markets under EMU," CSEF Working Papers 126, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
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  4. Marta Gomez-Puig, 2007. "Eu-15 Sovereign Governments Cost Of Borrowing After Seven Years Of Monetary Union," IREA Working Papers 200711, University of Barcelona, Research Institute of Applied Economics, revised May 2007. [Downloadable!]
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