Interest rate convergence, sovereign credit risk and the European debt crisis: a survey

Gruppe, Mario; Basse, Tobias; Friedrich, Meik; Langé, Christine

doi:10.1108/jrf-01-2017-0013

Cited by 24 publications

(21 citation statements)

References 54 publications

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“…Such an overreaction has been observed after the global economic crisis of 2007-2008(De Grauwe and Ji 2012Seremetis and Pappas 2013). Similar conclusions are drawn from the paper of Gruppe et al (2017). They support the view that the introduction of the euro has eliminated exchange rate risk for financial transactions among those countries that have decided to join the EMU.…”

Section: Literature Reviewsupporting

confidence: 82%

“…The Ecrisis dummy variable indicates whether financial crisis impacts are present in the given period affecting government bond yields. However, this approach has the limitation that, as Gruppe et al (2017) have already indicated, the impact of a European shock can be also endogenously determined. Furthermore, liquidity within the Euro area is associated significantly with government borrowing costs.…”

mentioning

confidence: 99%

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The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils

Pappas

Kostakis

2020

IJFS

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This study presents empirical evidence about the determinants of long-term government bond yields for 19 economies of the European Monetary Union (EMU) over the period 1995–2018 within a multivariate panel framework. The fixed effects estimators reveal that the relationship between public debt to the GDP ratio and yields is non-linear. We observe a threshold, which is determined to be at the area 90% of the ratio of public debt to GDP. Beyond that, area government borrowing costs increase as the public debt rises. Furthermore, we find evidence that a GDP decline and the downgrades of sovereign ratings increase the costs of government borrowing. In contrast, the operation of independent fiscal institutions helps to reduce government’s debt risk premium. Finally, liquidity in the Euro area plays a significant role on yields determination. The results remain robust when the dynamic instrumental variable fixed effect (FE-2SLS) and dynamic panel least square dummy variable corrected (LSDVC) estimators are employed. Empirical findings suggest important policy implications for the ongoing Covid-19 crisis for the EMU.

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Section: Literature Reviewsupporting

confidence: 82%

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confidence: 99%

The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils

Pappas

Kostakis

2020

IJFS

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“…In January 1999, the Euro became the new currency in initially 11 European countries (see, for example, Pollard 2003 and Gruppe et al. 2017 ). From this point on, these states have started to form the EMU.…”

Section: Interest Rate Convergence In the European Monetary Unionmentioning

confidence: 99%

Risk premia and the European government bond market: new empirical evidence and some thoughts from the perspective of the life insurance industry

et al. 2021

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We study yield spreads between government bonds in the European Monetary Union. This segment of the global fixed income market is of particular importance for insurance companies in Europe. Our empirical research strategy is inspired by Gunay (2020) who has analyzed the relationship between credit and liquidity risk in the United States using Granger causality tests. More specifically, we employ the procedure developed by Toda and Yamamoto (1995) to test for Granger causality among yield spreads in five different member countries of the European Monetary Union (namely Austria, Belgium, France, Italy and Ireland) relative to Germany. We examine interest rate data from bonds with three different maturities (5, 10 and 30 years). Given the importance of long-term bonds as asset class for European life insurers and pension funds, the empirical results from the often ignored market for government bonds with a maturity of 30 years should be of interest. With regard to long-term sovereign debt, there is no evidence for Granger causality among the time series examined here. Consequently, the risk premia required by investors to hold government bonds of one specific member country of the EMU do not help to forecast the risk premia that have to be paid by other countries. Given the structure of their liabilities, this empirical finding should be of high relevance for portfolio and risk managers in the European life insurance industry and in pension funds. With regard to the yield spreads to be observed in the market for 10-year government bonds, there seems to be no clear picture. Focusing on fixed income securities with a maturity of 5 years, there is one very interesting empirical finding. The test results reported here seem to imply that there is unidirectional Granger causality running from the yield spreads in all other four countries to Austria. Given that Austria is a comparably small country which is assumed to be in a fiscally stable position, this result could be interpreted as evidence for credit risk premia as being helpful to forecast liquidity risk premia in the market for medium-term government bonds issued by member states of the European Monetary Union.

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“…They found that the number of causal relationships increased as the financial and sovereign debt crisis unfolded in the euro area. Gruppe and Lange (2017) surveyed the literature on the interest rate convergence in the EMU countries. They showed that the euro's introduction has caused interest rate convergence among the EMU government bond yields.…”

Section: Literature Reviewmentioning

confidence: 99%

What Explains the Sovereign Credit Default Swap Spreads Changes in the GCC Region?

Naifar

2020

JRFM

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This paper aimed to investigate the drivers of sovereign credit risk spreads changes in the case of four Gulf Cooperation Council (GCC) countries, namely Kingdom of Saudi Arabia (KSA), the United Arab Emirates (UAE), Qatar, and Bahrain. Specifically, we explained the changes in sovereign credit default swap (hereafter SCDS) spreads at different locations of the spread distributions by three categories of explanatory variables: global uncertainty factors, local financial variables, and global financial market variables. Using weekly data from 5 April 2013, to 17 January 2020, and the quantile regression model, empirical results indicate that the global factors outperform the local factors. The most significant variables for all SCDS spreads are the global financial uncertainty embedded in the Chicago Board Options Exchange (CBOE) volatility index (VIX) and the global conventional bond market uncertainty embedded in the Merrill Lynch Option Volatility Estimate (MOVE) index. Moreover, the MOVE index affects the various SCDS spreads only when the CDS markets are bullish. Interestingly, the SCDS spreads are not affected by the global economic policy and the gold market uncertainties. Additionally, a weak dependence is observed between oil prices and SCDS spreads. For the country-specific factors, stock market returns are the most significant variable and impact the SCDS spreads at different market circumstances.

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Interest rate convergence, sovereign credit risk and the European debt crisis: a survey

Cited by 24 publications

References 54 publications

The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils

The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils

Risk premia and the European government bond market: new empirical evidence and some thoughts from the perspective of the life insurance industry

What Explains the Sovereign Credit Default Swap Spreads Changes in the GCC Region?

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