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Fundamentally wrong: market pricing of sovereigns and the Greek financial crisis

Author

Listed:
  • Heather D. Gibson

    (Bank of Greece)

  • Stephen G. Hall

    (University of Leicester, Bank of Greece and University of Pretoria)

  • George S. Tavlas

    (Bank of Greece)

Abstract

We investigate the impact of the economic fundamentals, sovereign credit ratings, political uncertainty, and the ECB’s Securities Markets Program (SMP) on Greek sovereign spreads. Our findings show that sovereign downgrades and political uncertainty appear to have been drivers of the sharp rises in Greek sovereign spreads from 2008-9 onwards, over-and-above the impact of the economic fundamentals. Our findings also show that prior to 2008-2009, the markets failed to incorporate Greece’s deteriorating fundamentals into the price of Greek sovereigns. We demonstrate that, once markets reassessed their pricing of Greek credit risk, the change in the influence of the fundamentals came swiftly and abruptly, exhibiting overshooting characteristics. The SMP reduced spreads while it was in operation.

Suggested Citation

  • Heather D. Gibson & Stephen G. Hall & George S. Tavlas, 2013. "Fundamentally wrong: market pricing of sovereigns and the Greek financial crisis," Special Conference Papers 20, Bank of Greece.
  • Handle: RePEc:bog:spaper:20
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    More about this item

    Keywords

    euro area financial crisis; sovereign spreads;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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