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Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia

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  • Bernoth, Kerstin
  • Wolff, Guntram B.

Abstract

We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected "creative" part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.

Suggested Citation

  • Bernoth, Kerstin & Wolff, Guntram B., 2006. "Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia," Discussion Paper Series 1: Economic Studies 2006,19, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4470
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    More about this item

    Keywords

    Risk premia; government bond yields; creative accounting; stock-flow adjustments; gimmickry; transparency;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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