Default Premia on European Government Debt
by Ingunn M. Lønning of the Norges Bank
Abstract: This paper addresses the question of the existence and size of a risk premium in the Eurobond market. We measure the yield difference between German government bonds and bonds issued in Deutsche Mark by several European countries. The results are regressed against macroeconomic variables supposed to be determinants of the risk of default on government debt. Our yield differences are smaller than those found between US states. However, some of our macroeconomic variables seem to be good predictors of yield differentials. A natural conclusion is that yield differentials partially are related to risks perceived by market participants.
Keywords: Bond Yield, Default, EMU, Government Debt, Risk Premium.
Published in: Review of World Economics, Vol. 136, No. 2, (June 2000), pp. 259-283.