Working Paper: CEPR ID: DP4465
Authors: Kerstin Bernoth; Ludger Schuknecht; Jürgen von Hagen
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 Codes: E43; E62; G12; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt and debt service ratios of the issuer country (F34) | yield spreads between EU countries and Germany or the USA (F34) |
| EMU membership (F36) | liquidity risk premia (G19) |
| EMU membership (F36) | bond pricing of member states (H74) |
| debt (H63) | default risk premia (G12) |
| EMU membership (F36) | marginal effects of debt on default risk premia (H63) |
| national debt share of total EU debt (H63) | interest rates (E43) |
| debt service (H63) | interest rates (E43) |
| EMU membership (F36) | disciplinary function of credit markets (G21) |