Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia

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Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia

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Bernoth, Kerstin
Wolff, Guntram B.

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Abstract

We 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 regressions confirm these results by addressing potential reverse causality problems and measurement bias.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2006,19.

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Date of creation: 2006
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Handle: RePEc:zbw:bubdp1:4470

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Paper
- Kerstin Bernoth & Guntram Wolff, 2006. "Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia," DNB Working Papers 103, Netherlands Central Bank, Research Department. [Downloadable!]
- Kerstin Bernoth & Guntram B. Wolff, 2006. "Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]

Find related papers by JEL classification:
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
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
H6 - Public Economics - - National Budget, Deficit, and Debt

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-08-05 (All new papers)
NEP-FIN-2006-08-05 (Finance)
NEP-FMK-2006-08-05 (Financial Markets)
NEP-MAC-2006-08-05 (Macroeconomics)
NEP-PBE-2006-08-05 (Public Economics)

References listed on IDEAS
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Full references

Cited by:
(explanations, 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.)

Hallerberg, Mark & Wolff, Guntram B., 2006. "Fiscal institutions, fiscal policy and sovereign risk premia," Discussion Paper Series 1: Economic Studies 2006,35, Deutsche Bundesbank, Research Centre. [Downloadable!]
Heppke-Falk, Kirsten H. & Wolff, Guntram B., 2007. "Moral hazard and bail-out in fiscal federations: evidence for the German Länder," Discussion Paper Series 1: Economic Studies 2007,07, Deutsche Bundesbank, Research Centre. [Downloadable!]
Gábor P. Kiss, 2007. "One-off and off-budget items: An alternative approach," MNB Conference Volume, Magyar Nemzeti Bank (The Central Bank of Hungary), vol. 1(1), pages 18-27, December. [Downloadable!]

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