Towards a Common European Monetary Union Risk Free Rate

56 Pages Posted: 12 Jun 2019

See all articles by Sergio Mayordomo

Sergio Mayordomo

Banco de España

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Eduardo S. Schwartz

Simon Fraser University (SFU); University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 2011

Abstract

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

Mayordomo, Sergio and Peña, Juan Ignacio and Schwartz, Eduardo S., Towards a Common European Monetary Union Risk Free Rate (2011). CNMV Working Paper No. 51 (2011), Available at SSRN: https://ssrn.com/abstract=3400624

Sergio Mayordomo

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Juan Ignacio Peña (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Eduardo S. Schwartz

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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