Neglected Risk: Evidence from the Eurozone Sovereign Credit Market

74 Pages Posted: 13 Feb 2020 Last revised: 30 Mar 2021

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: March 30, 2021

Abstract

We find evidence consistent with neglected risk in the eurozone sovereign credit
market, for crisis and non-crisis countries alike, using a novel variable of sovereign
debt expansion (DE) that we construct. Even though DE predicts increased default
probability, panel regressions from 2002–2017, show a negative association between DE
and premia. Risk neglect was briefly interrupted by the 2010 Deauville Summit, but
resumed by the onset of the 2011 Eurozone crisis. The introduction of quantitative
easing since 2015 has muted the impact of neglected risk, therefore raising the concern
of what will happen once quantitative easing ends.

Keywords: CDS spreads, risk premia, debt expansion, sovereign debt, 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 (March 30, 2021). 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

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