DP4465 Sovereign Risk Premia in the European Bond Market

Author(s): Kerstin Bernoth, Ludger Schuknecht, Jürgen von Hagen
Publication Date: July 2004
Keyword(s): asset pricing, determination of interest rates, fiscal policy, government debt
JEL(s): E43, E62, G12, H63
Programme Areas: International Macroeconomics, Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4465

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.