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Sovereign Spreads

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Author Info

  • Miguel A. Segoviano Basurto
  • Carlos Caceres
  • Vincenzo Guzzo

Abstract

Over the past year, euro area sovereign spreads have exhibited an unprecedented degree of volatility. This paper explores how much of these large movements reflected shifts in (i) global risk aversion (ii) country-specific risks, directly from worsening fundamentals, or indirectly from spillovers originating in other sovereigns. The analysis shows that earlier in the crisis, the surge in global risk aversion was a significant factor influencing sovereign spreads, while recently country-specific factors have started playing a more important role. The perceived source of contagion itself has changed: previously, it could be found among those sovereigns hit hard by the financial crisis, such as Austria, the Netherlands, and Ireland, whereas lately the countries putting pressure on euro area government bonds have been primarily Greece, Portugal, and Spain, as the emphasis has shifted towards short-term refinancing risk and long-term fiscal sustainability. The paper concludes that debt sustainability and appropriate management of sovereign balance sheets are necessary conditions for preventing sovereign risk from feeding back into broader financial stability concerns.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/120.

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Length: 29
Date of creation: 01 May 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/120

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Related research

Keywords: Bonds; Economic models; Global Financial Crisis 2008-2009; Risk premium; Sovereign debt; Spillovers; probability; bond; bond yields; probabilities; government bond; equation; sovereign bond; government bonds; random variables; government bond yields; financial stability; financial markets; sovereign bonds; financial institutions; bond market; equations; financial sector; government bond market; optimization; correlations; corporate bonds; bond spreads; standard errors; normal distribution; multivariate distribution; regression analysis; conditional expectation; cumulative distribution function; statistics; causation; treasury bonds; calculus; multivariate distributions; calibration; linear regressions; autocorrelation; normal distributions; time series; constant term; integral; sovereign bond market; calculus of variations; linear model; maximum likelihood estimation; correlation;

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References

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  1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  2. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Alois Geyer & Stephan Kossmeier & Stefan Pichler, 2004. "Measuring Systematic Risk in EMU Government Yield Spreads," Review of Finance, Springer, Springer, vol. 8(2), pages 171-197.
  4. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers, Financial Markets Group dp627, Financial Markets Group.
  5. 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.
  6. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  7. von Hagen, Jürgen & Schuknecht, Ludger & Wolswijk, Guido, 2011. "Government bond risk premiums in the EU revisited: The impact of the financial crisis," European Journal of Political Economy, Elsevier, Elsevier, vol. 27(1), pages 36-43, March.
  8. Coudert, Virginie & Gex, Mathieu, 2008. "Does risk aversion drive financial crises? Testing the predictive power of empirical indicators," Journal of Empirical Finance, Elsevier, Elsevier, vol. 15(2), pages 167-184, March.
  9. Afonso, António & Strauch, Rolf, 2004. "Fiscal policy events and interest rate swap spreads: evidence from the EU," Working Paper Series, European Central Bank 0303, European Central Bank.
  10. Miguel A. Segoviano Basurto & Raphael A. Espinoza, 2011. "Probabilities of Default and the Market Price of Risk in a Distressed Economy," IMF Working Papers 11/75, International Monetary Fund.
  11. Manganelli, Simone & Wolswijk, Guido, 2007. "Market discipline, financial integration and fiscal rules: what drives spreads in the euro area government bond market?," Working Paper Series, European Central Bank 0745, European Central Bank.
  12. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 110-138.
  13. Miguel Segoviano, 2006. "Consistent Information Multivariate Density Optimizing Methodology," FMG Discussion Papers, Financial Markets Group dp557, Financial Markets Group.
  14. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
  15. Ashoka Mody, 2009. "From Bear Stearns to Anglo Irish," IMF Working Papers 09/108, International Monetary Fund.
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