Sovereign Bond Risk Premiums

53 Pages Posted: 9 Jun 2013

See all articles by Engelbert J. Dockner

Engelbert J. Dockner

WU Vienna University of Economics and Business (deceased)

Manuel Mayer

Oesterreichische Nationalbank (OeNB)

Josef Zechner

Vienna University of Economics and Business

Date Written: May 2013


Credit risk has become an important factor driving government bond returns. We therefore introduce an asset pricing model which exploits information contained in both forward interest rates and forward CDS spreads. Our empirical analysis covers euro-zone countries with German government bonds as credit risk-free assets. We construct a market factor from the first three principal components of the German forward curve as well as a common and a country-specific credit factor from the principal components of the forward CDS curves. We find that predictability of risk premiums of sovereign euro-zone bonds improves substantially if the market factor is augmented by a common and an orthogonal country-specific credit factor. While the common credit factor is significant for most countries in the sample, the country-specific factor is significant mainly for peripheral euro-zone countries. Finally, we find that during the current crisis period, market and credit risk premiums of government bonds are negative over long subintervals, a finding that we attribute to the presence of financial repression in euro-zone countries.

Keywords: Bond risk premiums, market and credit risk factors, financial repression

JEL Classification: G12

Suggested Citation

Dockner, Engelbert J. and Mayer, Manuel and Zechner, Josef, Sovereign Bond Risk Premiums (May 2013). Available at SSRN: or

Engelbert J. Dockner (Contact Author)

WU Vienna University of Economics and Business (deceased)

Heiligenstaedter Strasse 46-48
Vienna, 1190
+431313366302 (Phone)
+43131336906302 (Fax)


Manuel Mayer

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
1010 Vienna, A-1011

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019

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