The Relative Pricing of Sovereign Credit Risk after the Eurozone Crisis
50 Pages Posted: 30 Aug 2017 Last revised: 3 Apr 2020
Date Written: March 16, 2020
We investigate whether riskier European countries compensate their debtholders properly by paying out sufficiently higher bond yields compared to those of safer European countries, during and after the sovereign debt crisis of 2010-2012. Using the relative pricing between credit default swap (CDS) spreads and bond yields, we show that an inconsistent cross-sectional relationship between sovereign default risk and sovereign bond yields emerges during the crisis period for all European countries. However, after the announcement of the Outright Monetary Transaction (OMT) program by the European Central Bank, the consistent cross-sectional relationship between default risk and bond yields is restored for the Eurozone countries only, a result likely due to a reduction in transaction costs.
Keywords: Sovereign CDS, Bond Yields, Eurozone Crisis, OMT Programme
JEL Classification: G01, G12, E50
Suggested Citation: Suggested Citation