Government Bond Risk Premiums in the EU Revisited: The Impact of the Financial Crisis

29 Pages Posted: 27 Feb 2010

See all articles by Ludger Schuknecht

Ludger Schuknecht

European Central Bank (ECB)

Jürgen von Hagen

University of Bonn

Guido Wolswijk

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2010

Abstract

This note looks at US$ and DM/Euro denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads before and during the crisis can largely be explained on the basis of economic principles. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.

Keywords: Interest Rates, Fiscal Policy, Government Debt, Crisis, Risk Aversion, Safe Haven

JEL Classification: E43, E62, H63, H74

Suggested Citation

Schuknecht, Ludger and Hagen, Jürgen von and Wolswijk, Guido, Government Bond Risk Premiums in the EU Revisited: The Impact of the Financial Crisis (February 23, 2010). ECB Working Paper No. 1152, Available at SSRN: https://ssrn.com/abstract=1540653

Ludger Schuknecht (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6494 (Phone)
+49 69 1344 7809 (Fax)

Jürgen von Hagen

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Guido Wolswijk

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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