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Sovereign risk premia in the European government bond market

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Author Info
Kerstin Bernoth () (Research Division, De Nederlandsche Bank)
Jürgen von Hagen () (Center for European Integration Studies)
Ludger Schuknecht () (DG Economics, European Central Bank)

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Abstract

This paper provides a study of bond yield differentials among EU eurobonds issued between 1991 and 2002. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premia which increase with the debt, deficit and debt-service ratio and depend positively on the issuer’s relative bond market size. Global investors’ attitude towards credit risk, measured as the yield spread between low grade US corporate bonds and government bonds, also affects bond yield spreads between EU countries and Germany/USA. The start of the European Monetary Union had significant effects on the bond pricing of the member states.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 369.

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Length: 37 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040369

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Related research
Keywords: asset pricing; determination of interest rates; fiscal policy; government debt.;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Capeci, John, 1994. "Local fiscal policies, default risk, and municipal borrowing costs," Journal of Public Economics, Elsevier, vol. 53(1), pages 73-89, January. [Downloadable!] (restricted)
  2. Copeland, Laurence & Jones, Sally-Anne, 2001. "Default Probabilities of European Sovereign Debt: Market-Based Estimates," Applied Economics Letters, Taylor and Francis Journals, vol. 8(5), pages 321-24, May. [Downloadable!] (restricted)
  3. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1046-59, November. [Downloadable!] (restricted)
  4. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States," CEPR Discussion Papers 1088, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 503-532, October. [Downloadable!] (restricted)
  6. Arnold, Ivo & Lemmen, Jan, 2001. "The Vulnerability of Banks to Government Default Risk in the EMU," International Finance, Blackwell Publishing, vol. 4(1), pages 101-25, Spring. [Downloadable!] (restricted)
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