RISK PERCEPTIONS AND FUNDAMENTAL EFFECTS
ON SOVEREIGN SPREADS
Dimitris A. Georgoutsos
Athens University of Economics & Business
Petros M. Migiakis
Bank of Greece
Abstract
We examine the determinants of spreads based on views regarding sovereign riskiness. The empirical analysis relies on panel data estimation techniques for 30 sovereign bonds for the period of 2009Q1 to 2017Q1, with data in quarterly frequency. We find that indeed there is a wide asymmetry in the effects exercised by sovereign spreads’ determinants, which is related to the riskiness of the sovereign. Low-risk spreads are found to be more sensitive to the prospects of higher growth rates and inflation; high-risk spreads are found to be more sensitive to idiosyncratic volatility and global volatility. Also, our results indicate that primary surpluses indeed lower spreads, but this reduction is not strong enough to ‘shield’ the sovereign against volatility; thus, policy makers should avoid ‘noise’ that may undermine investor confidence by increasing idiosyncratic volatility.
Keywords: sovereign spreads; credit ratings; quantile regressions; investor perceptions; fundamentals; volatility
JEL: F34; F45; G12; G15; H30
Acknowledgements: We thank Ms. Heather Gibson for her comments and suggestions. Any remaining errors are ours. The views expressed in the present paper are those of the authors and do not necessarily reflect those of the Bank of Greece.
Correspondence:
Petros M. Migiakis
Economic Analysis and Research Department
Bank of Greece
21, El. Venizelos Av.
10250 Athens, Greece
Tel: +30 2103203587
Email: pmigiakis@bankofgrece.gr