The Relative Pricing of Sovereign Credit Risk after the Eurozone Crisis

45 Pages Posted: 30 Aug 2017 Last revised: 27 Jun 2018

See all articles by Raffaele Corvino

Raffaele Corvino

University of Torino & CERP

Francesco Ruggiero

University of Naples Federico II

Date Written: March 16, 2018

Abstract

The paper analyses the relative pricing between sovereign CDS spreads and sovereign bond yields, for European countries, during and after the sovereign debt crisis of 2010-2012. In particular, we focus on the cross-sectional relationship between CDS spreads and bond yields across the European countries, and we investigate whether the differences across countries in terms of default risk, priced in the CDS spreads, are consistently priced in the cross-section of the bond yields. We show that an inconsistent cross-sectional relationship between CDS spreads and bond yields emerges during the crisis period for all the European countries, while after the announcement of the Outright Monetary Transaction (OMT) Programme, by the European Central Bank, the consistent cross-sectional relationship between default risk and bond yields is restored for the Eurozone countries only.

Keywords: Sovereign CDS, Bond Yields, Eurozone Crisis, OMT Programme

JEL Classification: G01, G12, E50

Suggested Citation

Corvino, Raffaele and Ruggiero, Francesco, The Relative Pricing of Sovereign Credit Risk after the Eurozone Crisis (March 16, 2018). Available at SSRN: https://ssrn.com/abstract=3028070 or http://dx.doi.org/10.2139/ssrn.3028070

Raffaele Corvino (Contact Author)

University of Torino & CERP ( email )

Corso Unione Sovietica 218bis
Piazza Arbarello 8
Torino, 10134
Italy
+39 3465316931 (Phone)

HOME PAGE: http://raffaelecorvino.com

Francesco Ruggiero

University of Naples Federico II ( email )

via Cinthia, 21
Naples, Napoli 80126
Italy

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