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The relative pricing of sovereign credit risk after the Eurozone crisis

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  • Corvino, Raffaele
  • Ruggiero, Francesco

Abstract

We investigate whether riskier European countries compensate their debtholders properly by paying sufficiently higher bond yields than those of safer European countries, during and after the sovereign debt crisis of 2010–2012. Using the relative pricing between credit default swap (CDS) spreads and bond yields, we show that an inconsistent cross-sectional relationship between sovereign default risk and sovereign bond yields emerges during the crisis period for all European countries. However, after the announcement of the Outright Monetary Transaction (OMT) program by the European Central Bank, the consistent cross-sectional relationship between default risk and bond yields is restored for the Eurozone countries only, a result likely due to a reduction in transaction costs.

Suggested Citation

  • Corvino, Raffaele & Ruggiero, Francesco, 2021. "The relative pricing of sovereign credit risk after the Eurozone crisis," Journal of International Money and Finance, Elsevier, vol. 112(C).
  • Handle: RePEc:eee:jimfin:v:112:y:2021:i:c:s026156062030293x
    DOI: 10.1016/j.jimonfin.2020.102337
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    More about this item

    Keywords

    Relative pricing; Bond yields; OMT program; Default risk;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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