Neglected Risk: Evidence from the Eurozone Sovereign Credit Market

75 Pages Posted: 13 Feb 2020

See all articles by Somayyeh Lotfi

Somayyeh Lotfi

University of Cyprus - Department of Accounting and Finance

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: February 7, 2020

Abstract

We find evidence of neglected risk during sovereign debt expansions (DE), by analyzing the sovereign debt markets for both crisis and non-crisis Eurozone countries from 2002-2017. After showing that DE predicts increased default probability, we first provide initial evidence that conditional on large DE, future risk premia are negative. Second, we document the negative relation between DE and future risk premia in a panel regression framework. Third, we document the impact that the Deauville summit in October 2010 had on neglected risk, by using panel regressions one year before and after this event. Our results provide evidence of neglected risk before, but not immediately after Deauville. Finally, analyzing the most recent data (2012-2017) we show that DE still predicts lower risk premia, however this effect is neutralized by quantitative easing (QE), therefore raising the public policy question of what will happen after QE ends.

Keywords: Risk premia, debt expansion, CDS spreads, sovereign debt, Deauville, Quantitative easing

JEL Classification: E52, E58, G41, H30, H63

Suggested Citation

Lotfi, Somayyeh and Milidonis, Andreas and Zenios, Stavros A., Neglected Risk: Evidence from the Eurozone Sovereign Credit Market (February 7, 2020). Available at SSRN: https://ssrn.com/abstract=3533715 or http://dx.doi.org/10.2139/ssrn.3533715

Somayyeh Lotfi

University of Cyprus - Department of Accounting and Finance ( email )

Cyprus

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Stavros A. Zenios (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
25
Abstract Views
209
PlumX Metrics