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Sovereign risk premia in the Euro Area and the role of contagion

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  • Linciano Nadia
  • Giordano Luca
  • Soccorso Paola
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    Abstract

    This work estimates a reduced model of the determinants of the 10-year yield spreads relative to Germany for 10 Eurozone countries. Results show that since the inception of the 2007 crisis, spreads have exhibited a rising time-dependent component. Country specific estimated responses to financial turmoil highlight three major results: core countries have not been affected by financial contagion during the subprime crisis, and from 2011 onwards, they have benefited from government yield spreads that are lower than what is explainable by the underlying fundamentals. Peripheral member countries (except Italy) - which from the outset of the EMU benefited from underpricing of their economic and fiscal fragility due to the implicit bailout insurance - have suffered from a revision of market expectations since 2010. Italy, penalized by its historically high debt to GDP ratio, has been hit by a rising contagion effect since 2010, which is estimated to account for 180 b.p. of the spread observable in the 1st semester of 2012.

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    Bibliographic Info

    Article provided by Società editrice il Mulino in its journal Journal of Financial Management, Markets and Institutions.

    Volume (Year): (2013)
    Issue (Month): 1 (January)
    Pages: 66-70

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    Handle: RePEc:mul:jdp901:doi:10.12831/73634:y:2013:i:1:p:66-70

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    Related research

    Keywords: Government Yield Spreads; Sovereign Risk Premia; Financial Crisis; Sovereign Debt Crisis; Contagion (JEL Codes: G12; E43; H63);

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    1. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006. "Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market," NBER Working Papers 12376, National Bureau of Economic Research, Inc.
    2. Raffaela Giordano & Marcello Pericoli & Pietro Tommasino, 2013. "Pure or Wake-up-Call Contagion? Another Look at the EMU Sovereign Debt Crisis," International Finance, Wiley Blackwell, vol. 16(2), pages 131-160, 06.
    3. Metiu, Norbert, 2012. "Sovereign risk contagion in the Eurozone," Economics Letters, Elsevier, vol. 117(1), pages 35-38.
    4. Antonio Di Cesare & Giuseppe Grande & Michele Manna & Marco Taboga, 2012. "Recent estimates of sovereign risk premia for euro-area countries," Questioni di Economia e Finanza (Occasional Papers) 128, Bank of Italy, Economic Research and International Relations Area.
    5. Carlo Favero & Alessandro Missale, 2012. "Sovereign spreads in the eurozone: which prospects for a Eurobond?," Economic Policy, CEPR & CES & MSH, vol. 27(70), pages 231-273, 04.
    6. Massimiliano Caporin & Loriana Pelizzon & Francesco Ravazzolo & Roberto Rigobon, 2013. "Measuring Sovereign Contagion in Europe," NBER Working Papers 18741, National Bureau of Economic Research, Inc.
    7. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    8. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
    9. Pietro Alessandrini & Michele Fratianni & Andrew Hughes Hallett & Andrea Filippo Presbitero, 2012. "External imbalances and financial fragility in the euro area," Mo.Fi.R. Working Papers 66, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    10. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
    11. 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.
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