Pricing Sovereign Bond Risk in the European Monetary Union Area: An Empirical Investigation

We use a panel of 10 euro area countries to assess the determinants of long‐term sovereign bond yield spreads over the period 1999.01–2010.11. We find that government bond yield spreads are well explained by fiscal fundamentals over the crisis period. We also find that the menu of risk factors priced by markets has been significantly enriched since March 2009, including international risk, liquidity risk and the risk of the crisis' transmission among European Monetary Union member states. Finally, we find that transmission risk has increased considerably since spring 2009 because of rapidly increasing risk of investing in periphery bonds relative to core ones.