Abstract

HETEROGENEITY OF THE DETERMINANTS OF EURO-AREA SOVEREIGN BOND SPREADS; WHAT DOES IT TELL US ABOUT FINANCIAL STABILITY?

Dimitris A. Georgoutsos

Athens University of Economics & Business

Petros M. Migiakis

Bank of Greece

ABSTRACT

In this paper we assess the movements of euro area sovereign bond yield spreads vis-à-vis the German Bund as processes specified across different levels of volatility and subject to movements in asset prices and economic conditions. The determinants we use are grouped into domestic and euro-area aggregates, thus allowing us to derive results on their relative explanatory power for movements in spreads and compare them across time and the spectrum of countries. We find that volatility influences the deterministic processes of the euro area sovereign spreads and that identical determinants have effects on spreads that vary considerably across countries. Furthermore, we find that economic sentiment indices are the most important determinants and their significance remains, to a large extent, even when controlling for the debt-to-GDP ratio.   

Keywords: bond spreads; euro area; investment confidence; financial stability.

JEL classification: F21; F36; G12; G15; G32.

Acknowledgements: The authors have benefitted from comments and suggestions made by Hiona Balfoussia, Heather Gibson and George Kouretas, as well as participants of the 10^th Hellenic Finance and Accounting Association Conference. The views expressed in this paper are those of the authors and do not, necessarily, reflect official stance of their respective institutions.

Correspondence:

Petros M. Migiakis

Economic Research Department,

Bank of Greece,

21 El. Venizelou Ave.,

10250, Athens, Greece,

Tel.: 0030-210-320 3587