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

Author

Listed:
  • 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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    References listed on IDEAS

    as
    1. Luciana Barbosa & Sónia Costa, 2010. "Determinants of sovereign bond yield spreads in the euro area in the context of the economic and financial crisis," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
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    More about this item

    Keywords

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

    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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