Towards a Common European Monetary Union Risk Free Rate
56 Pages Posted: 12 Jun 2019
Date Written: 2011
We propose a common European bond which would yield a common European Monetary Union risk free rate. We present a tentative estimate of this common risk free for the European Monetary Union countries from January 2004 to December 2010 using variables motivated by a theoretical portfolio selection model. First, we analyze the determinants of EMU sovereign yield spreads and find significant effects of the credit quality, macro, correlation, liquidity and interaction variables. Robustness tests with different data frequencies, benchmarks, liquidity and risk variables, cross section regressions, balanced panels and maturities confirm the initial results. Then, we estimate a common risk free rate and show that this common rate would imply, in most cases, average savings in borrowing costs for all the countries involved although under some extreme market circumstances, some countries may suffer increased borrowing costs.
Keywords: Euro government bonds; Credit quality; Liquidity; Macro factors
JEL Classification: F33, G12, H63
Suggested Citation: Suggested Citation