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The pricing of G7 sovereign bond spreads – The times, they are a-changin

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  • D’Agostino, Antonello
  • Ehrmann, Michael
Abstract
Against the background of the current debate about fiscal sustainability in several advanced economies, this paper estimates determinants of G7 sovereign bond spreads, using high-frequency proxies for market expectations about macroeconomic fundamentals and allowing for time-varying parameters. The paper finds substantial asymmetry in the importance of country fundamentals and considerable time variations in the pricing of risks. There has been a reduced pricing of several risk factors in the years preceding the financial crisis, and either an over-pricing of risk or the pricing of a re-denomination risk of euro area bonds during the European sovereign debt crisis, a pattern that does not apply to the non-euro area G7 bonds.

Suggested Citation

  • D’Agostino, Antonello & Ehrmann, Michael, 2014. "The pricing of G7 sovereign bond spreads – The times, they are a-changin," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 155-176.
    • Handle: RePEc:eee:jbfina:v:47:y:2014:i:c:p:155-176
    DOI: 10.1016/j.jbankfin.2014.06.001
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    More about this item

    Keywords

    Sovereign spreads; Fiscal policy; Time-varying coefficients;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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