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Bond Yield Spreads in the Eurozone

Author

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  • Proksová Denisa
  • Bohdalová Mária

    (Faculty of Management, Comenius University, Bratislava, Slovakia)

Abstract

Euro Area sovereign bond yield spreads fell significantly after the creation of the monetary union and moved in unison until the recession of 2008, when investors’ risk pricing changed considerably. Rising bond yield spreads caught the attention of economists who tried to find the factors influencing their size. Evolution of bond spreads was mostly related to various macroeconomic factors as well as the soundness of the countries’ banking sectors and a general level of risk aversion in the financial markets. Analysis presented in this paper compares bond yield spreads of Euro Area member countries and relates them to their debt levels as well as the liquidity of the securities and a general level of risk aversion. Apart from the usual variables, we also analysed differences in purchasing power to assess the impact of the common monetary policy in the pre-crisis period. After adjusting the model to better explain movements of linear regression residuals, we could not prove a systematic assessment of the above-mentioned factors except for time periods of high market volatility. We explain sudden changes in the importance of idiosyncratic factors as consequences of policies of the European Central Bank and other European Union institutions following such time periods, which, as our analysis suggests, distorted pricing of risk in the markets.

Suggested Citation

  • Proksová Denisa & Bohdalová Mária, 2015. "Bond Yield Spreads in the Eurozone," Scientific Annals of Economics and Business, Sciendo, vol. 62(2), pages 222-240, July.
    • Handle: RePEc:vrs:aicuec:v:62:y:2015:i:2:p:222-240:n:6
    DOI: 10.1515/aicue-2015-0015
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    References listed on IDEAS

    as
    1. Ashoka Mody & Damiano Sandri, 2012. "The eurozone crisis: how banks and sovereigns came to be joined at the hip [‘A pyrrhic victory? Bank bailouts and sovereign credit risk’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 27(70), pages 199-230.
    2. Luciana Barbosa & Sónia Costa, 2010. "Determinants of sovereign bond yield spreads in the euro area in the context of the economic and financial crisis," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    3. António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers 2012_14, Business School - Economics, University of Glasgow.
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    7. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers 2008 - 2015 388, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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