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Risk perceptions and fundamental effects on sovereign spreads

Author

Listed:
  • Dimitris A. Georgoutsos

    (Athens University of Economics & Business)

  • Petros M. Migiakis

    (Bank of Greece)

Abstract

We examine the determinants of spreads based on views regarding sovereign riskiness. The empirical analysis relies on panel data estimation techniques for 30 sovereign bonds for the period of 2009Q1 to 2017Q1, with data in quarterly frequency. We find that indeed there is a wide asymmetry in the effects exercised by sovereign spreads’ determinants, which is related to the riskiness of the sovereign. Low-risk spreads are found to be more sensitive to the prospects of higher growth rates and inflation; high-risk spreads are found to be more sensitive to idiosyncratic volatility and global volatility. Also, our results indicate that primary surpluses indeed lower spreads, but this reduction is not strong enough to ‘shield’ the sovereign against volatility; thus, policy makers should avoid ‘noise’ that may undermine investor confidence by increasing idiosyncratic volatility.

Suggested Citation

  • Dimitris A. Georgoutsos & Petros M. Migiakis, 2018. "Risk perceptions and fundamental effects on sovereign spreads," Working Papers 250, Bank of Greece.
  • Handle: RePEc:bog:wpaper:250
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    More about this item

    Keywords

    sovereign spreads; credit ratings; quantile regressions; investor perceptions; fundamentals; volatility;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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