Government Bond Yield Spreads Research Articles

“Whatever It Takes!” How tonality of TV-news affected government bond yield spreads during the European debt crisis

Were government bond risk premia affected by the media in addition to the effects of major events? Revisiting the European debt crisis, we analyze the role of television news in the rise and re-convergence of GIIPS bond spreads vis-à-vis Germany from 2007 to 2016. We use a dataset of more than one million human-coded news items from leading newscasts worldwide to identify over 25,000 news on the Eurozone and country-specific economic topics. Our findings emphasize the relevance of the tonality of news, such that an increasing share of positive (negative) news correlates with a decrease (increase) in spreads. Content-based endogenous clustering of news highlights the importance of news about institutions providing stability and “international financial support” to distressed countries in reducing bond spreads. Moreover, weekend news enables us to establish a causal link between country-specific news coverage and changes in spreads on the subsequent trading day.

“Whatever it Takes!” How Tonality of TV-News Affected Government Bond Yield Spreads During the European Debt Crisis

“Whatever it Takes!” How Tonality of TV-News Affected Government Bond Yield Spreads During the European Debt Crisis

Principal component regression in GAMLSS applied to Greek–German government bond yield spreads

A solution to the problem of having to deal with a large number of interrelated explanatory variables within a generalized additive model for location, scale and shape (GAMLSS) is given here using as an example the Greek–German government bond yield spreads from 25 April 2005 to 31 March 2010. Those were turbulent financial years, and in order to capture the spreads behaviour, a model has to be able to deal with the complex nature of the financial indicators used to predict the spreads. Fitting a model, using principal components regression of both main and first order interaction terms, for all the parameters of the assumed distribution of the response variable seems to produce promising results.

The Evolution of the Lead-lag Markets in the Price Discovery Process of the Sovereign Credit Risk: the Case of Italy

Abstract Hedging and speculative strategies play a key role in periods of financial market volatility particularly during economic crises. In such contexts, liquidity problems tend to evolve into potential credit risk events that amplifies the volatility of several markets such as the CDS and the government bond markets. The former, however, generally embodies a higher sensitivity to volatility due to the operators’ uncertainty about unstable and countercyclical counterparty risk. The aim of this paper is to analyze the long-lasting dynamic relationship between credit default swap (CDS) premia and government bond yield spreads (GBS), by focusing particularly on sovereign credit risk, in order to evaluate the lead-lag markets in the price discovery process against the backdrop of a deep financial crisis. The focus of this study concerns the country of Italy, one of the major European countries that suffers from both weak GDP growth and high public debt, which subjects it to volatility and speculation during periods of financial stress. JEL classification numbers: G01, G12, G14, G20. Keywords: CDS spreads, Government bond spreads, Credit risk, Cointegration, Vector error correction model, Granger-causality.

Veto players, market discipline, and structural fiscal consolidations

Based on a sample of 16 Western OECD countries we show that although veto players with heterogeneous political preferences reduce the probability of a structural fiscal consolidation, the effect of veto players declines with greater financial market pressure, which we measure as the spread between the long-term government bond yield and the corresponding yield in a base country (either the United States or Germany). We proxy veto players with heterogeneous political preferences primarily by the political constraints index of Henisz (Econ Polit 12(1):1–31, 2000). Our findings support the view that, as long as government bond yield spreads are sufficiently narrow, financial market pressure exerts a disciplining effect on fiscal policy by counteracting the political deadlock resulting from veto players who obstruct structural fiscal consolidations. The mirror image of our finding is that financial market pressure exerts a more positive impact on the likelihood of a structural fiscal consolidation in political environments characterized by many heterogeneous veto players.

A Reappraisal of the Causal Relationship between Sentiment Proxies and Stock Returns

This article investigates the suitability of 13 investor sentiment proxies as causal explanations for monthly stock returns of the European S&P 350 constituents over 45 years. We analyzed a sample of 362 companies covering 16 European countries. Analyses incorporate multiple categories of investor sentiment arising from market or survey data, as well as technical analysis, risk measures, company fundamentals and macroeconomic variables. In addition, we provide an extended review of sentiment proxy measures based on market data. This work applied general model of moments (GMM) to dynamic panel data to estimate short-run and long-run influences along with Granger causality. Our findings demonstrate the role of several investor sentiment measures in predicting stock returns even after controlling for variables such as fundamentals, macroeconomic, market and technical analysis. Together, sentiment measures of implied volatility in stock options, such as VIX and VSTOXX, put and call ratios, gold, government bond yield spreads, mispricing along with economic and confidence sentiment indicators can significantly predict how irrational behaviors of investors can determine stock returns. Co-movements between markets provide further evidence of contagion. Considering the unobservable nature of sentiment, we provide a set of sentiment proxies, and reveal new measures such as gold, government yields spread and a mispricing ratio, that serve to predict European market returns. Furthermore, to our knowledge this study is one of the few studies to apply time dynamic panel data estimation to a large set of sentiment proxies and a set of complete control variables in a long-term framework.

Capitalization rates and transaction activity in international office markets: A global perspective

Based on a sample of office markets in 33 cities across 16 countries for the period 2007–2015, this paper explores variations in commercial real estate transaction activity and asset pricing in international office markets. It is argued that there are complex interactions and feedback relationships between asset prices, transaction activity, market conditions and local institutional structures in real estate markets. Commercial real estate pricing is modelled using data on capitalization rates. The relationships found are consistent with previous research in terms of the importance of drivers such as government bond yields, yield spreads and real estate rents. Consistent with information network effects, it is also found that larger and more mature markets tend to have lower cap rates and, thus, higher asset prices. The results for transaction activity are less clear cut. Results from econometric analysis of turnover rates suggest that the same explanatory factors do not determine transaction activity to the same extent as cap rates. When purged of possible joint determinants, there is no evidence to support the view that cap rates affect market turnover rates or that turnover rates affect cap rates.

Interest Rate Differentials and Monetary Policy in the European Monetary Union: The Case of 10 and 30 Year Bonds

This empirical study uses techniques of time series analysis to examine how government bond yield spreads in France, Italy and Spain (relative to Germany) react to central bank actions in the European Monetary Union. More specifically, fixed income securities with maturities of 10 and 30 years are considered. These long term bonds should be of special importance for the European life insurance industry because of the liability structure of these financial services firms. Other central banks already have hiked interest rates and financial markets, as a consequence, now financial markets seem to be waiting for an increase to the Main Refinancing Operations Announcement Rate. Six bivariate VAR models are estimated. Our results imply that in general there is no strong positive reaction of the bond yield spreads to a contractionary monetary policy shock. Furthermore, there seems to be a negative reaction of the monetary policy rate to a positive shock to the government bond yield spread in the first months. In some cases (10 year bonds of France and Italy) this empirical finding is statistically significant. Therefore, the empirical evidence reported here is not only interesting from the viewpoint of economic theory but also has practical implications for asset managers in the European insurance industry.

Yield Spread Determinants & Reaction to Negative Event-shocks and Downgrades: The Case of Greece

The purpose of my study is to investigate the significance in the determination and worseness of ten year government bond yields spreads as well as the variation in the level of these spreads, factors like political risk and sovereign downgrades, considered as political and economic negative shocks in Greek economy during financial and public sector’s debt crisis. By extension to the main research, it is examined if shocks affected yields of two key sub-indexes of Athens Stock Exchange, ATHEX/FTSE large cap and ATHEX/Banks. The study extends from 1/1/2008 to 8/28/2015. My study is conducted in two stages, with similar goals. In this paper, I firstly investigate the role of significant, negatively signed political and economic events as well as sovereign downgrades, concerning Greece, in the determination of Greek ten-year bond spreads. In addition to the main research, I examine the influence of these negative shock-events in the yields of ATHEX/FTSE large cap index and ATHEX/Banks index. For this purpose, I make a series of regressions, since most studies analyzing the determinants of bond yield spreads rely on simple linear regression models and use OLS method of regression, as well. Secondly, I make an event-study, in Excel, on cumulative yields of the two latter indexes and on the yields of Greek bonds’ spreads and their movements ten days before and ten days after events and credit ratings that took place throughout the sample period. For the needs of the study, I reassess all models as well as the event study for three sub-time periods, namely “pre-crisis” period, from 1/1/2008 to 5/5/2010, “mid-crisis” period, from 5/6/2010 to 12/16/2014 and “new-crisis” period, from 12/17/2014 to 8/28/2015. Overall, the results that gave this empirical analysis seem to be very useful for politicians, for market makers and for market participants. It is mentioned that the evidence and conclusions occurred in the first part of this empirical analysis are confirmed, since they are in agreement with the findings of the event study that is in the second part of my research. Concluding, Greek government bond yield spreads are influenced from shock events and downgrades, mainly, during new crisis and pre-crisis period, respectively. Throughout the mid-crisis period neither yields of Athens stock Exchange indexes nor negatively signed shock events, including ratings, could cause a significant movement in spreads. This maybe means that, during this period, only other risk, fundamental or macroeconomic parameters could affect spreads. Especially from results of event study occurs the exact way that bond yield spreads and the yields of ATHEX/FTSE large cap and ATHEX/Banks indexes reacted ten days before and since an event-shock happened. The observed significant movements of spreads and the abnormal yields of indexes before the shock maybe indicates a leakage of information or a good prediction ability of market, while the noticed abnormal movements of spreads and yields after the event-day reflect the way of investors’ reaction in shocks.

Economic volatility and sovereign yields’ determinants: a time-varying approach

Using monthly data for 10 euro area countries between 1999:01 and 2015:12, we take a new three-step methodological approach: first, we inspect the key determinants of 10-year government bond yield spreads; second, we compute country-specific time-varying coefficient models of spreads’ determinants; third, we use these estimates as explanatory variables in panel regressions using output volatility as the dependent variable. We find that better fiscal positions or higher-than-expected economic growth prospects reduce the yield spreads, while increases in the VIX, bid-ask spread, debt-to-GDP ratio or real effective exchange rate appreciation increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the global financial crisis. Finally, for the case of the budget balance and real growth (bid-ask spread, debt-to-GDP ratio, real effective exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) the economic volatility.

Explosive behaviour and long memory with an application to European bond yield spreads

AbstractThis article deals with the interplay of explosive behaviour and long memory. We conduct Monte Carlo simulations and study the finite‐sample properties of the popular unit root test by Phillips et al. (2011) against explosive alternatives. This test exhibits severe upward size distortions under the presence of strongly autocorrelated residuals. We propose the usage of a set of adjusted critical values which leads to a size‐controlled test with increased power. As a complement, we consider the Lagrange Multiplier test against long memory by Tanaka (1999). We study European government bond yield spreads during the financial crisis.

Sovereign Stress, Banking Stress, and the Monetary Transmission Mechanism in the Euro Area

We investigate to what extent sovereign stress and banking stress have contributed to the increase in the level and in the heterogeneity of non-financial firms’ financing costs in the Euro area during the European debt crisis and how both have affected the monetary transmission mechanism. Employing a large firm-level data set containing 2 million observations, we are able to identify the effect of government bond yield spreads (sovereign stress) and the share of non-performing loans (banking stress) on firms' financing costs in a panel model by assuming that idiosyncratic shocks to individual firms are uncorrelated with country-specific variables. We find that the two sources of stress have increased firms’ financing costs controlling for country and firm-specific factors. Moreover, we estimate both to have significantly impaired the monetary transmission mechanism.

57 Channels (and Nothin on) - Does TV-News on the Eurozone Affect Government Bond Yield Spreads?

This paper empirically investigates the relationship between TV news coverage and the GIIPS countries’ bond yield spreads using daily data between January 1, 2007 and December 1, 2016. We employ 1,542,233 human coded news items from evening news shows of leading TV stations in 12 countries which include 37,859 news on the EU, on the Eurozone and on country-specific economic issues. We find that an increasing share of news about the Eurozone reduces yield spreads, especially when the news has a positive tonality. This hints at the effectiveness of political communication through the media by European institutions and in particular the European Central Bank (ECB). In conjunction with the tonality of the news, we find that country-specific news have a significant impact on GIIPS yield spreads. A higher share of positive/negative news is positively associated with a decrease/increase of the GIIPS yield spreads vis-a-vis Germany. Moreover, some news is not immediately and completely priced in by market participants when it is released. In addition, this peculiar effect of country specific news is stronger when the respective news is aired on the North American media market.

Asset liability management and the euro crisis

PurposeThis paper aims to investigate the long-term relationships of long-term European Monetary Union (EMU) government bond yields. From an asset managers’ or risk managers’ perspective during the euro crisis, the relevance of sovereign credit and redenomination risk became a major issue. Furthermore, it has to be differentiated between core and non-core EMU member countries.Design/methodology/approachMethods of applied time series analysis are used to investigate EMU government bond yields and EMU government bond yield spreads for Spain, Italy, The Netherlands, Austria and Germany. Both standard unit root testing procedures and breakpoint unit root tests are used to examine cointegrating relationships and structural changes in these relationships.FindingsThe empirical results deliver clear evidence for structural shifts in the long-term relationship between German and the two non-core EMU countries (Italy and Spain). The timing of the breaks coincides with the timing of the euro crisis. On the contrary, the results for Austria and The Netherlands are different from the findings for the two non-core countries.Research limitations/implicationsOne major limitation of the study is the limited availability of data regarding to the reaction of asset managers or risk managers to the euro crisis. Especially in the context of the discussion with regard to the relevant risk-free rate for investors, this strand of research is relatively new.Practical implicationsA deeper understanding of changes in the long-term relationship between government bond yields and the re-emergence of redenomination risk is important for asset managers and risk managers in the financial services industry. This is especially true for German life insurers.Originality/valueThe study provides various empirical contributions to the literature on the euro crisis and sovereign credit risk. First, previous results with regard to the structural changes in the long-term relationship between German and Spanish, German and Italian, German and Austrian as well as Germany and Dutch government bond yields are confirmed using unit root breakpoint tests. Second, investigating the autoregressive coefficient and the timing of the breaks delivers evidence that non-core countries have been more exposed to the fear of redenomination risk. Third, we raise the question which risk free interest rate is relevant for the affected countries.

Risk assessment on euro area government bond markets – The role of governance

Since the announcement of the outright monetary transactions program (OMT) government bond yield spreads have decreased substantially, but have not fallen to pre-crisis levels. This paper argues that the debt-to-GDP ratio has become less relevant as a determinant for government bond spreads, while financial markets have become more concerned about the willingness and the capability to cooperate with the institutions that conduct the adjustment programs since the announcement of OMT. The paper links the willingness and the capability to cooperate to political stability and the quality of governance, for which the indicators are available from the World Bank. By means of a time-varying coefficient approach it can be shown that the coefficient for a composite World Bank indicator on the quality of governance has outpaced other possible determinants of government bond spreads since the announcement of OMT.

Sovereign debt risk in emerging market economies: Does inflation targeting adoption make any difference?

Based on a sample of 38 emerging economies, we find that inflation targeting (IT) adoption improves sovereign debt risk. Next, we show that this favorable effect is sensitive to several structural characteristics, and to the considered time span. Finally, the measure of sovereign risk (sovereign debt ratings or government bond yield spreads) and the IT form (full-fledged or partial) equally influence the effect of IT adoption on sovereign debt risk. Thus, our paper provides valuable insights regarding IT implementation as a device for improving emerging market economies' access to international financial markets.

Budgetary decomposition and yield spreads

ABSTRACTWith a panel VAR of 10 Euro area countries, we studied the budgetary determinants of government bond yield spreads vis-à-vis Germany between 1999Q1 and 2012Q4. We find that rising bid ask, VIX and debt differentials increase yield spreads; and improvements in the budget balance, higher growth prospects and depreciation lower the spreads. Moreover, rises in public wages or in social expenditure increase spreads, while increases in direct and indirect taxes lower the yield spreads. In the post-2007Q3 crisis period, rising expenditure components (except subsidies) increased spreads.

Announcements of ECB unconventional programs: Implications for the sovereign spreads of stressed euro area countries

This paper studies the effects of ECB communications about unconventional monetary policy operations on the sovereign spreads of Greece, Ireland, Italy, Portugal, and Spain relative to Germany between 2008 and 2012. More than fifty events concerning non-standard operations are identified and classified with respect to the specific ECB program. The empirical results suggest that the ECB announcements about unconventional monetary policies substantially reduced long-term government bond yield spreads relative to German counterparts in all countries, except Greece. Particularly, among the different types of measures, news about the Securities Markets Programme strongly affected the perceived sovereign risk of the five stressed euro area countries, while the announcements of the Outright Monetary Transactions seem to have a significant impact only in Italy and Spain.

External Imbalances and Fiscal Fragility in the Euro Area

This paper presents two views of the European sovereign debt crisis. The first is that countries in the South of the Eurozone were fiscally irresponsible and failed to implement pro-competitive supply side policies. The second view holds that the crisis reflects a deep divide between the external surpluses of the North and external deficits of the South. Basic stylized facts cast doubt on the explanation based on the first thesis alone. A relatively simple model shows how poor fundamentals can create a debt problem independently of fiscal responsibility. The empirical analysis of the determinants of government bond yield spreads relative to Germany suggests that both views in fact provide useful insights into the roots of the current sovereign crisis. However, differences in growth and competitiveness and capital flows between North and South have assumed a much more dominant role since the onset of the global crisis.

Testing for a break in the persistence in yield spreads of EMU government bonds

This study tests for a break in the persistence of EMU government bond yield spreads examining data from France, Italy and Spain and using German interest rates as a kind of benchmark. The results reported here provide evidence for breaks between 2006 and 2008. The persistence of the yield spreads against German government bonds has increased significantly after this period. This could be a sign of higher sovereign credit risk (and possibly even redenomination risk) caused by the debt crisis in the euro area. We find clear indications for non-stationary behavior after the breakpoints and empirical evidence for positive excess kurtosis and GARCH-effects when persistence increases.