An Update on EMU Sovereign Yield Spread Drivers in Times of Crisis: A Panel Data Analysis

Abstract

We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries. Moreover, the increase in the significance of the banking level of indebtedness and foreign bank's claims in the public sector (mainly in peripheral countries) along with the crisis unfolding seems to highlight the interconnection between private and public debt and thus, between banking and sovereign crises. Dear Professor Beladi, Thank you very much for accepting for publication the revised version of our paper. Please find enclosed a copy of the revised version of the paper " An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis " (jointly written with Marta Gómez-Puig and Maria del Carmen Ramos-Herrera).Following your instructions, we have put our manuscript in the format that is required for publication. Yours sincerely, Simon Sosvilla-Rivero AbstractWe empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries. Moreover, the increase in the significance of the banking level of indebtedness and foreig...

Nonfinancial debt and economic growth in euro-area countries

“…10 Nevertheless, with the financial crisis the picture changed completely and sovereign long term interest rates rose sharply. Indeed, the crisis put the spotlight on the macroeconomic and fiscal imbalances within EMU countries which had largely been ignored during the 1999-2009 period (see Gómez-Puig et al, 2014). 11 Alves and Pereira (2017) examine the dramatic indebtedness increase among households in Portugal, detecting a structural break around 1992, which may correspond to the signing of the Maastricht Treaty which ultimately led to this decline in interest rates and consequently the increase in indebtedness.…”

Incorporating Creditors' Seniority into Contingent Claim Models: Applicarion to Peripheral Euro Area Countries

“…Many authors have also stressed the importance of other fundamental variables beyond the country's fiscal position to explain yield spread behaviour after the outbreak of the crisis (Allen et al (2011) or Acharya and Schnabl (2014), to name a few). In particular, Gomez-Puig et al (2014) empirically investigate the determinants of EA sovereign bond yield spreads with respect to the German bund from January 1999 to December 2012, using panel data techniques and examining the role of a very exhaustive set of potential drivers. Their results stress that the rise in sovereign risk during the crisis can only partially be explained by the evolution of local macroeconomic variables.…”

“…The dependent variables in our empirical analysis are the proposed DtD indicator and the three traditional measures of sovereign risk (yield spread, CDS, and rating). With regard to the independent variables (Table 12), we consider both fundamental variables and market sentiment variables (see, e.g., Gomez-Puig et al (2014) and references within). Three of the fundamental variables are used to measure the country's fiscal position; the government debt-to-GDP ratio (DEBT), the government deficit-to-GDP (DEF) and the index of the fiscal stance (FSI) suggested by Wickens (2011a, 2012a).…”

Relationships of long-term interest rates in European Union countries

“…Na długookresową rentowność obligacji słaby wpływ wywiera nominalna inflacja (Goldberg, Leonard, 2003). Z inflacją skorelowane są stopy nominalne (Chionis, Pragidis, Schizas, 2014;Gómez-Puig, Sosvilla-Rivero, Ramos-Herrera, 2014). W okresach kryzysowych na wadze zyskuje prognoza salda budżetowego i związane z nią programy naprawy finansów publicznych oraz sytuacja sektora finansowego (Assman, Boysen-Hogrefe, 2011;Weber, Jaramillo, 2013;Beirne, Fratzcher, 2013).…”