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Investor sentiment and yield spread determinants: evidence from European markets

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  • Spyros Spyrou

Abstract

Purpose - – This paper aims to investigate the yield spread determinants for a sample of European markets in the light of the recent financial crisis. It utilises findings from two different strands in the literature: findings on bond spread determinants and findings on the effect of investor sentiment on equity returns. Design/methodology/approach - – The explanatory variables in the regression models proxy not only for economic fundamentals (e.g. economic activity, default risk, liquidity risk, general market conditions) but also for investor sentiment. A vector autoregressive approach is employed. Findings - – The results indicate that fundamental variables are significant for the determination of the level of yield spreads, as suggested by previous studies. Local and international investor sentiment, however, both current and past, is also a statistically significant determinant for both the level and monthly changes of yield, especially during the crisis period 2007-2011. Research limitations/implications - – The implication of this finding is significant for all parties involved: government officials, private lenders, EU/ECB/IMF officials, and market participants. Practical implications - – Focusing solely on quantitative economic performance indicators may not have the desirable effect of reducing borrowing rates and facilitating the return to economic stability. Perhaps, reassuring and/or sending strong qualitative signals to financial markets may be as important. Involved agents may have to address not only technical financial issues but also the perception that market participants have about the proposed solutions to the crisis and eventually affect market sentiment. Originality/value - – The issue of the effect of investor sentiment on government yield spreads during a crisis has not been investigated before.

Suggested Citation

  • Spyros Spyrou, 2013. "Investor sentiment and yield spread determinants: evidence from European markets," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(6), pages 739-762, October.
  • Handle: RePEc:eme:jespps:v:40:y:2013:i:6:p:739-762
    DOI: 10.1108/JES-01-2012-0008
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    Citations

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    Cited by:

    1. Pedro Manuel Nogueira Reis & Carlos Pinho, 2021. "A Reappraisal of the Causal Relationship between Sentiment Proxies and Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 22(4), pages 420-442, October.
    2. Aristei, David & Martelli, Duccio, 2014. "Sovereign bond yield spreads and market sentiment and expectations: Empirical evidence from Euro area countries," Journal of Economics and Business, Elsevier, vol. 76(C), pages 55-84.
    3. Carla Fernandes & Paulo M. Gama & Elisabete Vieira, 2016. "Does local and Euro area sentiment matter for sovereign debt markets? Evidence from a bailout country," Applied Economics, Taylor & Francis Journals, vol. 48(9), pages 816-834, February.
    4. Mohsen Bahmani-Oskooee & Ruixin Zhang, 2015. "On the impact of financial development on income distribution: time-series evidence," Applied Economics, Taylor & Francis Journals, vol. 47(12), pages 1248-1271, March.
    5. Turkmen Muldur Gozde & Kandir Serkan Yılmaz & Onal Yıldırım Beyazıt, 2019. "Investor Sentiment and Speculative Bond Yield Spreads," Foundations of Management, Sciendo, vol. 11(1), pages 177-186, January.
    6. Galariotis, Emilios C. & Makrichoriti, Panagiota & Spyrou, Spyros, 2016. "Sovereign CDS spread determinants and spill-over effects during financial crisis: A panel VAR approach," Journal of Financial Stability, Elsevier, vol. 26(C), pages 62-77.
    7. Elroi Hadad & Haim Kedar-Levy, 2022. "The Impact of Retail Investors Sentiment on Conditional Volatility of Stocks and Bonds," Papers 2208.01538, arXiv.org.
    8. Galariotis, Emilios C. & Krokida, Styliani-Iris & Spyrou, Spyros I., 2016. "Bond market investor herding: Evidence from the European financial crisis," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 367-375.
    9. Stefan Abrantes Costa & Pedro Manuel Nogueira Reis & Antonio Pedro Soares Pinto, 2020. "Subjective/ Behavioural Factors Influence the PSI 20 and IBEX 35," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(5), pages 13-27, October.
    10. Li, Yulin, 2021. "Investor sentiment and sovereign bonds," Journal of International Money and Finance, Elsevier, vol. 115(C).

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