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Interest rate spreads in the Euro area: fundamentals or sentiments?

Author

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  • Maximilian Goedl

    (Karl-Franzens University of Graz)

  • Joern Kleinert

    (Karl-Franzens University of Graz)

Abstract

We analyze the determinants of interest rates on long-term government bonds within the Eurozone to assess whether the recent divergence in interest rates is attributable to changes in common economic fundamentals. First, we show that the panel approach, mostly employed by existing literature on this issue, has conceptual as well as empirical problems. Therefore we harness an event study approach using high-frequency (daily) data to investigate the impact of three categories of events on EMU government bond yields. Our results indicate that yields react to forecasts on key economic indicators such as growth and future budget deficits. In contrast, we do not find evidence that investors react to announcement of fiscal "bailouts" or austerity measures.

Suggested Citation

  • Maximilian Goedl & Joern Kleinert, 2013. "Interest rate spreads in the Euro area: fundamentals or sentiments?," Graz Economics Papers 2013-04, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2013-04
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    References listed on IDEAS

    as
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    5. Attinasi, Maria Grazia & Checherita-Westphal, Cristina & Nickel, Christiane, 2009. "What explains the surge in euro area sovereign spreads during the financial crisis of 2007-09?," Working Paper Series 1131, European Central Bank.
    6. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
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    More about this item

    Keywords

    Product differentiation; Gravity Equation; Cross-border bank lending;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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