We examine the impact of signals regarding the Eurozone’s bail-out commitment on government bond spreads in the Eurozone’s periphery, analysing the effect of positive, negative and mixed statements and decisions by the EU, the ECB and Germany. We construct a dataset of relevant events, and estimate their effects using distributed lag models, providing a number of robustness checks. Our main argument is that investors react to statements from credible actors, but largely ignore statements from less-credible actors, awaiting actual decisions. Accordingly, positive statements from the ECB have clear effects, while those from Germany and the EU do not. Furthermore, ECB decisions appear to be anticipated and thus have no short-term effects, while we find clear effects of positive decisions by Germany and the EU.
AizenmanJHutchisonMJinjarakY (2013) What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk. Journal of International Money and Finance34: 37–59.
2.
ArceOMayordomoSPeñaJI (2013) Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the Euro area crisis. Journal of International Money and Finance35(0): 124–145.
3.
BadaouiSCathcartLEl-JahelL (2013) Do sovereign credit default swaps represent a clean measure of sovereign default risk? A factor model approach. Journal of Banking and Finance37(7): 2392–2407.
4.
BechtelMM (2009) The political sources of systematic investment risk: Lessons from a consensus democracy. The Journal of Politics71(2): 661–677.
5.
BechtelMMSchneiderG (2010) Eliciting substance from ‘hot air’: Financial market responses to EU summit decisions on European defense. International Organization64(2): 199–223.
6.
BeetsmaRGiuliodoriMde JongF (2013) Spread the news: The impact of news on the European sovereign bond markets during the crisis. Journal of International Money and Finance34: 83–101.
7.
BeirneJFratzscherM (2013) The pricing of sovereign risk and contagion during the European sovereign debt crisis. Journal of International Money and Finance34: 60–82.
8.
BeraAKSosa-EscuderoWYoonM (2001) Tests for the error component model in the presence of local misspecification. Journal of Econometrics101(1): 1–23.
9.
BernhardWLeblangD (2006) Democratic processes and financial markets: Pricing politics, Cambridge: Cambridge University Press.
10.
BollerslevT (1986) Generalized autoregressive conditional heteroskedasticity. Journal of econometrics31(3): 307–327.
11.
BølstadJ (2015) Dynamics of European integration: Public opinion in the core and periphery. European Union Politics16(1): 23–44.
12.
BreenMMcMenaminI (2013) Political institutions, credible commitment, and sovereign debt in advanced economies. International Studies Quarterly57(4): 842–854.
BüchelK (2013) Do words matter? The impact of communication on the PIIGS’ CDS and bond yield spreads during Europe’s sovereign debt crisis. European Journal of Political Economy32: 412–431.
15.
Corsetti G and Dedola L (2011) Fiscal crises, confidence and default. A bare-bones model with lessons for the Euro area. Available at: https://sites.google.com/site/giancarlocorsetti/ (accessed 13 February 2014).
16.
Corsetti G, Kuester K, Meier A and Müller G (2013) Sovereign risk and belief-driven fluctuations in the Euro area. IMF Working Paper, November 2013.
17.
D’Agostino A and Ehrmann M (2013) The pricing of G7 sovereign bond spreads—the times, they are a-changin. ECB Working Paper Series 1520.
18.
De GrauwePJiY (2012) Mispricing of sovereign risk and macroeconomic stability in the Eurozone. Journal of Common Market Studies50(6): 866–880.
19.
De GrauwePJiY (2013) Self-fulfilling crises in the Eurozone: An empirical test. Journal of International Money and Finance34: 15–36.
20.
De HaanLHesselJvan den EndJW (2014) Are European sovereign bonds fairly priced? The role of modelling uncertainty. Journal of International Money and Finance47: 239–267.
21.
EngleRF (1982) Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the Econometric Society50(4): 987–1007.
FamaEF (1991) Efficient capital markets: II. The Journal of Finance46(5): 1575–1617.
25.
Gade T, Salines M, Glöckler G and Strodthoff S (2013) Loose lips sinking markets? The impact of political communication on sovereign bond spreads. ECB Occasional Paper Series 150, June 2013.
GhoshAROstryJDQureshiMS (2013) Fiscal space and sovereign risk pricing in a currency union. Journal of International Money and Finance34: 131–163.
28.
GoldbachRFahrholzC (2011) The Euro area’s common default risk: Evidence on the Commission’s impact on European fiscal affairs. European Union Politics12(4): 507–528.
29.
HatchondoJCMartinezL (2010) The politics of sovereign defaults. Economic Quarterly96(3): 291–317.
30.
KennedyP (2008) A Guide to Econometrics, Oxford: Blackwell Publishing.
31.
King G and Roberts ME (2014) How robust standard errors expose methodological problems they do not fix, and what to do about it. Political Analysis. DOI: 10.1093/pan/mpu015.
32.
KolbRW (2011) Sovereign Debt Theory, Defaults, and Sanctions, Hoboken, NJ: John Wiley & Sons.
33.
LanePR (2012) The European sovereign debt crisis. Journal of Economic Perspectives26(3): 49–68.
34.
Lütkepohl H, Staszewska-Bystrova A and Winker P (2013) Comparison of methods for constructing joint confidence bands for impulse response functions. International Journal of Forecasting. Epub ahead of print 8 December 2013. DOI: 10.1016/j.ijforecast.2013.08.003.
35.
MacKinlayAC (1997) Event studies in economics and finance. Journal of Economic Literature35(1): 13–39.
36.
McMenaminIBreenMMuñoz-PortilloJ (2015) Austerity and credibility in the eurozone. European Union Politics16(1): 45–66.
37.
MinkMde HaanJ (2013) Contagion during the Greek sovereign debt crisis. Journal of International Money and Finance34: 102–113.
38.
MohlPSondermannD (2012) Has political communication during the crisis impacted sovereign bond spreads in the Euro area?Applied Economics Letters20(1): 48–61.
39.
MosleyL (2003) Global Capital and National Governments, New York: Cambridge University Press.
40.
MosleyL (2004) Government–financial market relations after EMU: New currency, new constraints?European Union Politics5(2): 181–209.
41.
PatersonWE (2011) The reluctant hegemon? Germany moves centre stage in the European union. Journal of Common Market Studies49(s1): 57–75.
42.
SattlerT (2013) Do markets punish left governments?The Journal of Politics75(2): 343–356.
43.
SchneiderGBechtelMFahrholzCH (2009) Krieg, Kooperation, Kursverlauf: Die Internationale Politische Ökonomie von Finanzmärkten, Wiesbaden: VS Verlag für Sozialwissenschaften.
44.
SmeetsDZimmermannM (2013) Did the EU summits succeed in convincing the markets during the recent crisis?Journal of Common Market Studies51(6): 1158–1177.
45.
WhiteH (1980) A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica: Journal of the Econometric Society48(4): 817–838.
46.
WooldridgeJM (2002) Econometric Analysis of Cross-Section and Panel Data, Cambridge, MA: MIT Press.
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
