Sovereign Risk Premia in the European Bond Market

33 Pages Posted: 5 Aug 2004

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Ludger Schuknecht

European Central Bank (ECB)

Jürgen von Hagen

University of Bonn - Institute of Economic Policy; Centre for Economic Policy Research (CEPR)

Date Written: July 2004

Abstract

This Paper provides a study of bond yield differentials among EU eurobonds issued between 1991 and 2002. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premia which increase with the debt, deficit and debt-service ratio and depend positively on the issuer's relative bond market size. Global investors' attitude towards credit risk, measured as the yield spread between low grade US corporate bonds and government bonds, also affects bond yield spreads between EU countries and Germany/USA. The start of the European Monetary Union had significant effects on the bond pricing of the member states.

Keywords: Asset pricing, determination of interest rates, fiscal policy, government debt

JEL Classification: E43, E62, G12, H63

Suggested Citation

Bernoth, Kerstin and Schuknecht, Ludger and von Hagen, Jürgen, Sovereign Risk Premia in the European Bond Market (July 2004). Available at SSRN: https://ssrn.com/abstract=572845

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Ludger Schuknecht

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 (Contact Author)

University of Bonn - Institute of Economic Policy ( email )

Adenauerallee 24
D-53113 Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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