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Yield spreads on EMU government bonds — How the financial crisis has helped investors to rediscover risk

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  • Catharina Klepsch
  • Timo Wollmershäuser

Abstract

This study analyses the determinants of EMU member states’ government bond yield spreads from January 2000 until September 2010. Using a dynamic panel regression approach, the authors show that before the outbreak of the fi nancial crisis investors generally ignored fundamental sovereign bond risk factors. However, with the beginning of the fi nancial crisis yield spreads for many member countries escalated. The results indicate not only that investors began to re-evaluate countries’ credit risks (measured by projections of debt-to- GDP ratios), but also that risk aversion in the markets, which increased signifi cantly during the crisis, became a major determinant of sovereign bond spreads.
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Suggested Citation

  • Catharina Klepsch & Timo Wollmershäuser, 2011. "Yield spreads on EMU government bonds — How the financial crisis has helped investors to rediscover risk," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 46(3), pages 169-176, June.
  • Handle: RePEc:spr:intere:v:46:y:2011:i:3:p:169-176 DOI: 10.1007/s10272-011-0379-2
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    References listed on IDEAS

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    1. Manfred Neumann, 1991. "Precommitment by central bank independence," Open Economies Review, Springer, vol. 2(2), pages 95-112, June.
    2. Frenkel, Michael & Klein, Martin, 1991. "Fiskalpolitischer Harmonisierungszwang durch die europäische Währungsunion?," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW – German National Library of Economics / Leibniz Information Centre for Economics, vol. 71(3), pages 137-143.
    3. Michael Artis, 1991. "One market, one money: An evaluation of the potential benefits and costs of forming an economic and monetary union," Open Economies Review, Springer, vol. 2(3), pages 315-321, October.
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    Cited by:

    1. Elzbieta Szulc & Karolina Gorna & Dagna Wleklinska, 2016. "The share of European economies in the process of convergence of long-term interest rates in the EU in the period of 2006–2016," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 16, pages 165-187.
    2. repec:cii:cepiei:2015-q1-141-4 is not listed on IDEAS
    3. Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target loans, current account balances and capital flows: the ECB’s rescue facility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 468-508, August.
    4. Boris T. Petkov, 2017. "Excessive Debt or Excess Savings -- Transition Countries Sovereign Bond Spread Assessment," International Business Research, Canadian Center of Science and Education, vol. 10(3), pages 91-119, March.
    5. António Afonso & Frederico Silva Leal, 2017. "Sovereign yield spreads in the EMU: crisis and structural determinants," Working Papers Department of Economics 2017/09, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    6. Eichler, Stefan & Maltritz, Dominik, 2013. "The term structure of sovereign default risk in EMU member countries and its determinants," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1810-1816.

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