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PRICING SOVEREIGN BOND RISK IN THE EUROPEAN MONETARY UNION AREA: AN EMPIRICAL INVESTIGATION
Author(s) -
Afonso António,
Arghyrou Michael G.,
Kontonikas Alexandros
Publication year - 2014
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1484
Subject(s) - government bond , bond , economics , yield (engineering) , monetary economics , market liquidity , sovereignty , european union , risk premium , financial crisis , panel analysis , credit risk , international economics , panel data , financial system , macroeconomics , finance , econometrics , materials science , politics , political science , law , metallurgy
We use a panel of 10 euro area countries to assess the determinants of long‐term sovereign bond yield spreads over the period 1999.01–2010.11. We find that government bond yield spreads are well explained by fiscal fundamentals over the crisis period. We also find that the menu of risk factors priced by markets has been significantly enriched since March 2009, including international risk, liquidity risk and the risk of the crisis' transmission among European Monetary Union member states. Finally, we find that transmission risk has increased considerably since spring 2009 because of rapidly increasing risk of investing in periphery bonds relative to core ones. Copyright © 2013 John Wiley & Sons, Ltd.