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The pricing of G7 sovereign bond spreads: the times, they are a-changin

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  • Ehrmann, Michael
  • D'Agostino, Antonello

Abstract

Against the background of the current debate about fiscal sustainability in several advanced economies, this paper estimates determinants of G7 sovereign bond spreads, using high-frequency proxies for market expectations about macroeconomic fundamentals and allowing for time-varying parameters. The paper finds substantial asymmetry in the importance of country fundamentals and considerable time variations in the pricing of risks. There has been a reduced pricing of several risk factors in the years preceding the financial crisis, and either an overpricing of risk or the pricing of a re-denomination risk of euro area bonds during the European sovereign debt crisis. JEL Classification: E43, E44, F34, G15

Suggested Citation

  • Ehrmann, Michael & D'Agostino, Antonello, 2013. "The pricing of G7 sovereign bond spreads: the times, they are a-changin," Working Paper Series 1520, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131520
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    Keywords

    fiscal policy; sovereign spreads; time‐varying coefficients;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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