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Unobservable country bond premia and fragmentation

Author

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  • De Santis, Roberto A.
Abstract
Using either yield-to-maturity spreads or asset swap spreads for 1900 Eurobonds across euro area non-financial industries, we estimate excess bond premia computed as the duration-adjusted credit spreads in excess of idiosyncratic risks and observable country risks. We find that financial market fragmentation, defined as the unobservable country risk heterogeneity, characterise the euro area corporate bond market. It increased sharply after Lehman’s bankruptcy and during the sovereign debt crisis, despite the model controls for sovereign risk, interbank credit risk and the US VIX. An important driver of fragmentation during the hikes of the sovereign debt crisis was a higher price for credit and macro risks demanded by investors in one country compared to another country. There is evidence that fragmentation risk reverted its trend after Draghi’s “whatever it takes” speech.

Suggested Citation

  • De Santis, Roberto A., 2018. "Unobservable country bond premia and fragmentation," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 1-25.
    • Handle: RePEc:eee:jimfin:v:82:y:2018:i:c:p:1-25
    DOI: 10.1016/j.jimonfin.2017.12.003
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    Cited by:

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    3. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    4. Jan Kakes & Jan Willem van den End, 2023. "Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals?," Working Papers 778, DNB.
    5. Zaghini, Andrea, 2019. "The CSPP at work: Yield heterogeneity and the portfolio rebalancing channel," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 282-297.
    6. Holm-Hadulla, Fédéric & Thürwächter, Claire, 2021. "Heterogeneity in corporate debt structures and the transmission of monetary policy," European Economic Review, Elsevier, vol. 136(C).
    7. Guillaume Horny & Simone Manganelli & Benoit Mojon, 2018. "Measuring Financial Fragmentation in the Euro Area Corporate Bond Market," JRFM, MDPI, vol. 11(4), pages 1-19, October.
    8. Wang, Yabin & Wu, Sharon Xiaohui, 2023. "Local guarantees and SOE bond pricing in China," China Economic Review, Elsevier, vol. 78(C).
    9. Zaghini, Andrea, 2021. "The Covid pandemic in the market: Infected, immune and cured bonds," CFS Working Paper Series 653, Center for Financial Studies (CFS).
    10. Emambakhsh, Tina & Fuchs, Maximilian & Kördel, Simon & Kouratzoglou, Charalampos & Lelli, Chiara & Pizzeghello, Riccardo & Salleo, Carmelo & Spaggiari, Martina, 2023. "The Road to Paris: stress testing the transition towards a net-zero economy," Occasional Paper Series 328, European Central Bank.
    11. G. Arghyrou, Michael & Gadea, Maria-Dolores & Kontonikas, Alexandros, 2024. "Private bank deposits and macro/fiscal risk in the euro-area," Journal of International Money and Finance, Elsevier, vol. 140(C).
    12. Santis, Roberto A. De, 2018. "Unobservable systematic risk, economic activity and stock market," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 51-69.
    13. Alicia Aguilar, 2024. "Beyond Fragmentation: Unraveling the Drivers of Yield Divergence in the euro area," Working and Discussion Papers WP 9/2024, Research Department, National Bank of Slovakia.
    14. Lhuissier Stéphane & Nguyen Benoît, 2021. "The Dynamic Effects of the ECB’s Asset Purchases: a Survey-Based Identification," Working papers 806, Banque de France.

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    More about this item

    Keywords

    Corporate credit spreads; Excess bond premium; Fragmentation;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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