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Government bond yield spreads determination: a matter of fundamentals or market overreaction? Evidence from over-borrowed European countries

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  • Dimitris Vas. Seremetis

    (University of Aegean)

  • Anastasios P. Pappas

    (University of Aegean)

Abstract

This paper examines through a panel data analysis the determinants of government bond yield spreads for over-borrowed European countries (Belgium, Italy, Ireland, Greece, Portugal, Spain) for the period 1990–2010. The results suggest that the aforementioned government bond yield spreads were significantly increased during international financial crises. On the other hand, domestic macroeconomic fundamentals appear to be negligible drivers of government bond yield spreads for the same period. A high debt-to-GDP ratio seems to be an important determinant of spreads only after 2007, when the subprime mortgage crisis had burst out and market sentiment became negative. Thus the paper presents some evidence that sharp bond spread fluctuations may be driven by financial markets’ overreaction and investors’ herd behaviour during international financial crises. Financial markets seemed to neglect the deterioration of macroeconomic fundamentals of the six European countries during tranquil periods and seemed to start discriminating more, between countries, during crises.

Suggested Citation

  • Dimitris Vas. Seremetis & Anastasios P. Pappas, 2013. "Government bond yield spreads determination: a matter of fundamentals or market overreaction? Evidence from over-borrowed European countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 10(3), pages 342-358, December.
    • Handle: RePEc:elg:ejeepi:v:10:y:2013:i:3:p342-358
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    Cited by:

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    2. Anastasios Pappas & Ioannis Kostakis, 2020. "The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils," IJFS, MDPI, vol. 8(3), pages 1-13, September.

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    More about this item

    Keywords

    government bond spreads; European countries; macroeconomic fundamentals; credit rating agencies; financial crises; panel data analysis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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