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The pricing of G7 sovereign bond spreads – the times, they are a-changin

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  • D'Agostino, Antonello
  • Ehrmann, Michael

Abstract

Against the background of the current debate about fiscal sustainability in several advanced economies, this paper estimates the determinants of sovereign bond spreads of the G7 countries, using high-frequency proxies for market expectations about macroeconomic fundamentals. It allows for time-varying parameters and stochastic volatility as well as for asymmetry in the effects of countries’ fundamentals on yield spreads. The paper finds that there is substantial asymmetry in the importance of country fundamentals, which shrinks, the closer the two constituent bonds are to being substitutes. There are also considerable time variations in the role of the various determinants. In particular, there has been a reduced pricing of several risk factors in the years preceding the financial crisis, and either an over-pricing of risk or the pricing of catastrophic events like a break-up of the euro area and a re-denomination risk of euro area bonds during the European sovereign debt crisis.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40604.

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Date of creation: Aug 2012
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Handle: RePEc:pra:mprapa:40604

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Keywords: sovereign spreads; fiscal policy; time-varying coefficients;

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References

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  1. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
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Cited by:
  1. António Afonso & Michael G. Arghyrou & George Bagdatoglou & Alexandros Kontonikas, 2013. "On the time-varying relationship between EMU sovereign spreads and their determinants," Working Papers 2013_05, Business School - Economics, University of Glasgow.
  2. Ippei Fuijwara & Lena Mareen Korber & Daisuke Nagakura, 2013. "Is there asymmetry in the distribution of government bond returns in developed countries?," AJRC Working Papers 1301, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  3. Fujiwara, Ippei & Körber, Lena Mareen & Nagakura, Daisuke, 2013. "Asymmetry in government bond returns," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3218-3226.
  4. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Working Paper Series 1625, European Central Bank.

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