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Determinants of sovereign yield spreads during the Euro-crisis: Fundamental factors versus systemic risk

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  • Klose, Jens
  • Weigert, Benjamin

Abstract

The intensity of the Euro-crisis was reflected by significant increases of sovereign bond yields in the troubled countries. This has launched a hot debate whether this increase can solely be attributed to fundamental factors like e.g. rescue programmes, rising budget deficits, deteriorating economic prospects or changes in the rating-status of the country, or whether a part of these growing yields is likely to represent a systemic risk, i.e. that one or more countries will drop out of the European Monetary Union and reintroduce their own national currencies. This empirical analysis explores whether such systemic risk is present in the yield spreads of nine Euro area countries by using a novel market based indicator from the virtual prediction market Intrade. Our empirical results suggest that beside fundamental factors a systemic risk component played a role in determination of sovereign yields. Our empirical measure of the systemic component in sovereign yields can be related to the expected change of the newly introduced national currency. Accordingly to that, Portugal, Ireland, Spain and Italy are expected to depreciate their currency while the others would appreciate after a withdrawal from the Euro area. Risk premia that are related to fears of the reversibility of the Euro are unacceptable, and they need to be addressed in a fundamental manner. (ECB-President Mario Draghi, August 2012) Es gibt fundamentale Zweifel der Märkte an der Sicherheit der Währungsunion. (Bundesbankpräsident Jens Weidmann, July 2012)

Suggested Citation

  • Klose, Jens & Weigert, Benjamin, 2012. "Determinants of sovereign yield spreads during the Euro-crisis: Fundamental factors versus systemic risk," Working Papers 07/2012, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
  • Handle: RePEc:zbw:svrwwp:072012
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    Cited by:

    1. Gómez-Puig, Marta & Sosvilla-Rivero, Simón & Ramos-Herrera, María del Carmen, 2014. "An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 133-153.
    2. Paolo Canofari & Giancarlo Marini & Giovanni Piersanti, 2014. "Measuring Currency Pressure and Contagion Risks in Countries under Monetary Unions: The Case of Euro," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 42(4), pages 455-469, December.
    3. Paolo Canofari & Giancarlo Marini & Giovanni Piersanti, 2015. "Expectations and systemic risk in EMU government bond spreads," Quantitative Finance, Taylor & Francis Journals, vol. 15(4), pages 711-724, April.
    4. Christoph M. Schmidt & Benjammin Weigert, 2013. "Weathering the Crisis and Beyond: Perspectives for the Euro Area," Ruhr Economic Papers 0409, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    5. Christoph Schmidt & Benjamin Weigert, 2013. "Weathering the crisis and beyond: perspectives for the Euro area," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 564-595, August.
    6. repec:zbw:rwirep:0409 is not listed on IDEAS
    7. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2016. "Causes and hazards of the euro area sovereign debt crisis: Pure and fundamentals-based contagion," Economic Modelling, Elsevier, vol. 56(C), pages 133-147.

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