How Do Financial Institutions Forecast Sovereign Spreads?

44 Pages Posted: 18 Dec 2014

See all articles by Jacopo Cimadomo

Jacopo Cimadomo

European Central Bank; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Peter Claeys

Vrije Universiteit Brussel (VUB) - Faculty of Economic, Social and Political Sciences; European University Institute - Economics Department (ECO)

Marcos Poplawski-Ribeiro

International Monetary Fund (IMF)

Date Written: December 9, 2014

Abstract

This paper assesses how financial market participants form their expectations about future government bond spreads. Using monthly survey forecasts for France, Italy and the UK between January 1993 and December 2011, we test whether respondents consider the expected evolution of the fiscal balance — and other economic fundamentals — as significant drivers of the expected bond yield differential over a benchmark German 10-year bond. Our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads. Overall, the findings suggest that credible fiscal plans affect expectations of market experts, reducing the pressure on sovereign bond markets.

Keywords: market expectations, sovereign bond spreads, survey data, Consensus Economics Forecast

JEL Classification: E62, G10, H30

Suggested Citation

Cimadomo, Jacopo and Claeys, Peter and Poplawski-Ribeiro, Marcos, How Do Financial Institutions Forecast Sovereign Spreads? (December 9, 2014). ECB Working Paper No. 1750. Available at SSRN: https://ssrn.com/abstract=2535745

Jacopo Cimadomo (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Peter Claeys

Vrije Universiteit Brussel (VUB) - Faculty of Economic, Social and Political Sciences ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 191
B-1050 Brussels
Belgium

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Marcos Poplawski-Ribeiro

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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