Yield Spreads on Emu Government Bonds

Posted: 29 Dec 2004

See all articles by Alessandro Missale

Alessandro Missale

University of Milan - Department of Business Policy and Economics

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Abstract

We provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the United States are more pronounced for bonds issued by Italy and Spain. Liquidity factors play a smaller role, so policies meant to increase financial market efficiency do not appear sufficient to deliver a 'seamless' bond market in the euro area. The risk of default is a small but important component of yield differentials movements, which signal market perceptions of fiscal vulnerability, impose market discipline on national fiscal policies, and may be reduced only by further convergence in debt ratios.

Keywords: Bond market integration, credit risk, government bonds, liquidity premium, yield spreads

JEL Classification: E44, F36, G15, H63

Suggested Citation

Missale, Alessandro and Favero, Carlo A., Yield Spreads on Emu Government Bonds. Available at SSRN: https://ssrn.com/abstract=634084

Alessandro Missale (Contact Author)

University of Milan - Department of Business Policy and Economics ( email )

Via Conservatorio 7
I-20122 Milano
Italy

Carlo A. Favero

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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