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Identifying excessive spread dispersion in the euro area: When do sovereign spreads go beyond fundamentals?

Author

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  • Kakes, Jan
  • van den End, Jan Willem

Abstract

We present a metric for excessive spread developments in the Economic and Monetary Union (EMU), based on the dispersion of sovereign spreads relative to macro-financial fundamentals. To allow for time variation in this relationship and isolate the impact of fundamentals, we present rolling regressions that control for the role of market sentiment. The metric shows that the observed dispersion of spreads occasionally overshot the fundamentals-based benchmark for short episodes. Especially during the European debt crisis and the COVID crisis, these periods coincided with interventions by the European Central Bank to stabilize markets. We conclude that those interventions were effective to counteract excessive dispersion of sovereign spreads among EMU countries.

Suggested Citation

  • Kakes, Jan & van den End, Jan Willem, 2026. "Identifying excessive spread dispersion in the euro area: When do sovereign spreads go beyond fundamentals?," Journal of Empirical Finance, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:empfin:v:88:y:2026:i:c:s0927539826000642
    DOI: 10.1016/j.jempfin.2026.101750
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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