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Indiana University Bloomington

BEPP

The Kelley Advantage

The department is home to the authors of Managerial Economics and Business Strategy and Games and Information: An Introduction to Game Theory, two of the nation’s leading textbooks in the field.

Research and Publications

Journal Articles

Government Risk Premiums in the Bond Market: EMU and Canada

2009, European Journal of Political Economy

Ludger Schuknecht, Jürgen Von Hagen, Guido Wolswijk

Abstract

This article looks at US$ and DM/Euro-denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads during the crisis can largely be explained on the basis of the same variables as before the crisis. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.

Citation

von Hagen, Jürgen, Ludger Schuknecht, and Guido Wolswijk (2009), “Government Risk Premiums in the Bond Market: EMU and Canada,” European Journal of Political Economy, Vol. 25, No. 3, September, pp. 371-384. 

Keywords

Sovereign risk premiums; Bond markets; Financial crisis