Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia

40 Pages Posted: 13 Jun 2006

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Guntram B. Wolff

Deutsche Bundesbank; University of Bonn - Center for European Integration Studies (ZEI)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2006

Abstract

We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both the official fiscal position and the expected "creative" part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia.

Keywords: risk premia, government bond yields, creative accounting, stock-flow adjustments, gimmickry, transparency

JEL Classification: G12, E43, E62, H6, F34

Suggested Citation

Bernoth, Kerstin and Wolff, Guntram B., Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia (May 2006). CESifo Working Paper Series No. 1732, Available at SSRN: https://ssrn.com/abstract=908508

Kerstin Bernoth (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Guntram B. Wolff

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Bonn - Center for European Integration Studies (ZEI) ( email )

Regina-Pacis-Weg 3
Postfach 2220
D-53012 Bonn
Germany

HOME PAGE: http://www.uni-bonn.de/~guntram

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