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Decomposing euro area sovereign spreads: credit, liquidity and convenience

Author

Listed:
  • Marcello Pericoli

    () (Bank of Italy)

  • Marco Taboga

    () (Bank of Italy)

Abstract

We conduct an empirical analysis of sovereign bond spreads for a selected number of euro area countries. We analyze several methodologies to measure and to assess the relative importance of three components of sovereign spreads: credit premia, liquidity premia and convenience yields. We find that, except for Germany, credit premia explain the bulk of the level and variability in sovereign spreads, while liquidity premia and convenience yields seem to play a limited role, although they are in several cases statistically significant and they can become economically relevant during short episodes of illiquidity.

Suggested Citation

  • Marcello Pericoli & Marco Taboga, 2015. "Decomposing euro area sovereign spreads: credit, liquidity and convenience," Temi di discussione (Economic working papers) 1021, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1021_15
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    References listed on IDEAS

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    Cited by:

    1. Athanasios Orphanides, 2017. "The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound," European Economy - Discussion Papers 2015 - 060, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

    More about this item

    Keywords

    sovereign spreads; liquidity premia; convenience yields;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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