Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia
AbstractWe investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected "creative" part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable egressions confirm these results by addressing potential reverse causality problems and measurement bias.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 103.
Date of creation: Jun 2006
Date of revision:
Risk premia; government bond yields; creative accounting; stock-flow adjustments; gimmickry; transparency;
Other versions of this item:
- Kerstin Bernoth & Guntram B. Wolff, 2008. "Fool The Markets? Creative Accounting, Fiscal Transparency And Sovereign Risk Premia," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(4), pages 465-487, 09.
- Bernoth, Kerstin & Wolff, Guntram B., 2006. "Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia," Discussion Paper Series 1: Economic Studies 2006,19, Deutsche Bundesbank, Research Centre.
- Kerstin Bernoth & Guntram B. Wolff, 2006. "Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia," CESifo Working Paper Series 1732, CESifo Group Munich.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H6 - Public Economics - - National Budget, Deficit, and Debt
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-09 (All new papers)
- NEP-EEC-2006-07-09 (European Economics)
- NEP-FIN-2006-07-09 (Finance)
- NEP-FMK-2006-07-09 (Financial Markets)
- NEP-MAC-2006-07-09 (Macroeconomics)
- NEP-PBE-2006-07-09 (Public Economics)
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