| By: |
Dockner, Engelbert J.;
Mayer, Manuel;
Zechner, Josef |
| Abstract: |
Credit risk has become an important factor driving government bond returns. We
therefore introduce an asset pricing model which exploits information
contained in both forward interest rates and forward CDS spreads. Our
empirical analysis covers euro-zone countries with German government bonds as
credit risk-free assets. We construct a market factor from the first three
principal components of the German forward curve as well as a common and a
country-specific credit factor from the principal components of the forward
CDS curves. We find that predictability of risk premiums of sovereign
euro-zone bonds improves substantially if the market factor is augmented by a
common and an orthogonal country-specific credit factor. While the common
credit factor is significant for most countries in the sample, the
country-specific factor is significant mainly for peripheral euro-zone
countries. Finally, we find that during the current crisis period, market and
credit risk premiums of government bonds are negative over long subintervals,
a finding that we attribute to the presence of financial repression in
euro-zone countries. -- |
| Keywords: |
Sovereign bond risk premiums,Market and credit risk factors,Financial repression |
| Date: |
2013 |
| URL: |
http://d.repec.org/n?u=RePEc:zbw:cfswop:201328&r=fmk |