The importance of being earnest: Macroeconomic determinants of sovereign bond yield spreads in the Eurozone

Gonzalo Gomez-Bengoechea (Universidad Pontificia Comillas ICADE, Madrid, Spain)
Alfredo Arahuetes (Universidad Pontificia Comillas ICADE, Madrid, Spain)

Journal of Financial Economic Policy

ISSN: 1757-6385

Publication date: 1 April 2019



This paper aims to provide an empirical analysis of the macroeconomic determinants of sovereign bond yield spreads in the Eurozone from 2000 until August 2012, when the Outright Monetary Transactions programme was launched.


The authors constructed an unbalanced panel with quarterly data from 2000 Q1 to 2012 Q2 for the 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Luxembourg, Italy, The Netherlands, Portugal and Spain. The authors propose a model that explains spreads through the main categories of variables observed in the literature. The relationship between variables is analysed using ordinary least squares and quantile regressions. As discussed by the authors, quantile regressions provide a more precise estimation, given the huge heterogeneity across counties that can be observed in the Eurozone.


Results show that the relationship between sovereign risk and macroeconomic fundamentals is affected by a strong country sentiment effect. The impact of country sentiment on sovereign risk is larger for those countries that were already experiencing higher spreads. Regardless the impact that European Central Bank’s (ECB) intervention had on sovereign risk from 2012, quantile regression results suggest that policy recommendations and goals should be adapted to each country’s market perception.


The results obtained improve on previous findings on this topic (De Grauwe and Ji, 2012) in two ways. First, they show that even introducing every category of determinants found in the literature in the main specification, fundamentals can only partially explain the evolution of sovereign risk in the Eurozone. Second, they find there is a country-sentiment effect that affects the relationship between macroeconomic indicators and sovereign risk. Furthermore, the paper finds that the country-sentiment effect is larger for countries facing high spreads.



The authors of this article have not made their research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.


Gomez-Bengoechea, G. and Arahuetes, A. (2019), "The importance of being earnest: Macroeconomic determinants of sovereign bond yield spreads in the Eurozone", Journal of Financial Economic Policy, Vol. 11 No. 1, pp. 121-138.

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