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Determinants of sovereign debt yield spreads under EMU: Pairwise approach

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  • Fazlioglu S.

    (GSBE)

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    Abstract

    This study aims at providing an empirical analysis of long-term determinants of sovereign debt yield spreads under European EMU (Economic and Monetary Union) through pairwise approach within panel framework. Panel gravity models are increasingly used in the cross-market correlation literature while to our knowledge, this is the first empirical study employing the method in the bond market literature. Accordingly, sovereign yield spreads are positively related to differential government debt ratio while negatively related to relative economic growth performance, differential liquidity of the individual debt markets as well as governance quality. Moreover, non-linear dynamic panel estimates indicate that markets seem to ignore fundamentals after the emerge of EMU while the very same risk factors are revalued by the markets after the 2008/2009 financial crisis. Furthermore, markets price fiscal indebtedness more among the EMU members than among the non-EMU members. Finally, the results of the dynamic panel model are robust to different estimation techniques such as GMM as well as sample selection.

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    Bibliographic Info

    Paper provided by Maastricht University, Graduate School of Business and Economics (GSBE) in its series Research Memorandum with number 007.

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    Date of creation: 2013
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    Handle: RePEc:unm:umagsb:2013007

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    Keywords: Single Equation Models; Single Variables: Models with Panel Data; Longitudinal Data; Spatial Time Series; Interest Rates: Determination; Term Structure; and Effects; National Debt; Debt Management; Sovereign Debt;

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