Sovereign Risk Premiums in CEEC Countries: A Non-Parametric Matching Method

Abstract

In this paper, we develop a non-parametric matching method to estimate the over or under valuation of sovereign risk in Central and Eastern European Countries (CEECs) between 2004 and 2007. CEECs are matched to other countries that are very similar with regards to macroeconomic fundamentals. This set of countries then becomes an appropriate benchmark to assess the valuation of risk premiums. Our results show that markets may have underestimated sovereign risk premiums in CEECs by an average of 2.7 percentage point in the years following accession to the European Union.

Keywords: Sovereign risk, Central and Eastern European Countries, government bonds, matching methods

JEL Classification: C14, E43, F34, F36, G12, G15