No. 1021 - Decomposing euro area sovereign spreads: credit, liquidity and convenience

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by Marcello Pericoli and Marco Taboga July 2015

The paper provides an empirical analysis of sovereign bond spreads for selected euro-area countries. Several methodologies are used to measure and assess the relative importance of three components of sovereign spreads: credit premiums, liquidity premiums and convenience yields.

We find that, except for Germany, credit premiums explain most of both the level and the variability of spreads, while the other two factors play a limited role, although in several cases they are statistically significant and may become economically relevant during brief episodes of illiquidity.