After the outburst of the Great Recession in May 2008, the euro area sovereign yield spreads started to diverge, raising several questions about their potential drivers. A consensus was drawn towards the existence of a common factor that represents international risk aversion. The present thesis explores this conclusion, by incorporating a global financial stress index (in short GFSI), launched by Bank of America Merrill Lynch (BAML) in 2010. To shed light on the dynamics of the market-specific determinants, I initially conduct a series of OLS regressions in two subperiods: the Great Recession (2008-2010) and the Sovereign Debt Crisis (2010-2013). Besides, I expand my analysis by employing a dynamic OLS (DOLS) model to treat my results from a common characteristic of yield spreads; autocorrelation. I deploy this cointegrating model in the whole timespan of my dataset on both a country level and on an aggregate level. To achieve the latter, I construct market capitalization-weighted yield indices for the EMU core and peripheral countries. My results support that GFSI has a robust relationship with the majority of the EMU-yield spread differentials under bothcrises. Moreover, I conclude that, for countries with weak fiscal fundamentals, yield spreads are primarily explained by the country’s credit/liquidity profile and are prone to contagion risk. In contrast, for countries with robust macro-fundamentals yield spread differentials are mainly determined by global risk aversion and flight-to-liquidity, while contagion risk has a diminished effect.

Lemmen, J.J.G.
Economics of Management and Organisation
Erasmus School of Economics

Antoniou, I. (2020, April 20). EMU-Sovereign Bonds: Yield Spread Determinants. Great Recession vs Sovereign Debt Crisis. Economics of Management and Organisation. Retrieved from