Working Paper: NBER ID: w15353
Authors: Sergio Mayordomo; Juan Ignacio Peña; Eduardo S. Schwartz
Abstract: A common European bond would yield a common European Monetary Union risk free rate. We present tentative estimates of this common risk free for the European Monetary Union countries from 2004 to 2009 using variables motivated by a theoretical portfolio selection model. First, we analyze the determinants of EMU sovereign yield spreads and find significant effects of the credit quality, macro, correlation, and liquidity variables. However, their effects are different before and after the current financial crisis, being stronger in the latter period. Robustness tests with different data frequencies, benchmarks, liquidity variables, cross section regressions and balanced panels confirm the initial results. We propose four different estimates of the common risk free rate and show that, in most cases, this common rate could imply savings in borrowing costs for all the countries involved.
Keywords: European Monetary Union; Risk Free Rate; Sovereign Yield Spreads
JEL Codes: E43; E44; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CDS spreads (G12) | yield spreads (G12) |
| liquidity (E41) | yield spreads (G12) |
| total debt relative to GDP (H63) | yield spreads (G12) |
| trade balance (F14) | yield spreads (G12) |
| total debt * volatility of yield differences (H63) | yield spreads (G12) |