The issue of divergence of sovereign spreads in the Euro area, following the deep financial crisis initiated in 2008 can only in part be related to the stability of the institutional agreements behind the common currency. There is a... more
The issue of divergence of sovereign spreads in the Euro area, following the deep financial crisis initiated in 2008 can only in part be related to the stability of the institutional agreements behind the common currency. There is a widespread debate as of how spreads signal a justifiable credit risk differential within the area, or, rather, reflect irrational fears and subjective and biased reasoning. In this paper we suggest a way to filter out of the observed spreads a component which we dub physiological , which is the reflection of the reaction to difference between expectations and realizations of economic fundamentals. Such a component is a function of market volatility, a proxy which represents well how new information is processed. The model parameters are estimated over a tranquil period (2000-2007) and then, in keeping with a substantial stream of literature on the topic, they are kept unchanged over the more recent and more turbulent period (2008-2015). We apply our proc...
Abstract: Russia had more-or-less completed the privatization of its manufacturing and natural resource sectors by the end of 1997. And in February 1998, the annual inflation rate at last dipped into the single digits. Privatization... more
Abstract: Russia had more-or-less completed the privatization of its manufacturing and natural resource sectors by the end of 1997. And in February 1998, the annual inflation rate at last dipped into the single digits. Privatization should have helped with stronger micro-...
SYNOPSIS: We examine the relation between industry specialist auditors and cost-of-debt financing using a national and city level industry specialist framework. Consistent with the assumption that higher audit quality is associated with... more
SYNOPSIS: We examine the relation between industry specialist auditors and cost-of-debt financing using a national and city level industry specialist framework. Consistent with the assumption that higher audit quality is associated with lower information risk, which benefits clients in raising debt capital, we find that firms audited by city level industry specialist auditors, either alone or jointly with national level industry specialist auditors, enjoy significantly lower cost-of-debt financing measured by both credit rating and bond spread. Our results suggest that, compared to clients of non-industry specialists, firms’ odds of worse credit ratings are 0.859 (0.664) times lower, and their bond spreads are 17 (16) basis points lower if they are clients of city-level-only (joint national and city level) industry specialists. In addition, our evidence shows that, for joint national and city level industry specialists, both information and insurance roles are significant to reduce ...
We examine co-movement and predictability of Bond Spread of BRICS and PIIGS with respect to political risk (PR), financial risk (FR), and economic risk (ER). Our linear Granger causality findings imply that PR is the most important risk... more
We examine co-movement and predictability of Bond Spread of BRICS and PIIGS with respect to political risk (PR), financial risk (FR), and economic risk (ER). Our linear Granger causality findings imply that PR is the most important risk in predicting bond spread, followed by ER in both BRICS and in PIIGS, while FR is useful in predicting bond spread in BRICS only. Our nonlinear individual causality results infer that ER is the most important risk in predicting bond spread, followed by FR, and PR. We make a conjecture that linear and nonlinear causality are independent and our findings support this.
The issue of divergence of sovereign spreads in the Euro area, following the deep financial crisis initiated in 2008 can only in part be related to the stability of the institutional agreements behind the common currency. There is a... more
The issue of divergence of sovereign spreads in the Euro area, following the deep financial crisis initiated in 2008 can only in part be related to the stability of the institutional agreements behind the common currency. There is a widespread debate as of how spreads signal a justifiable credit risk differential within the area, or, rather, reflect irrational fears and subjective and biased reasoning. In this paper we suggest a way to filter out of the observed spreads a component which we dub physiological , which is the reflection of the reaction to difference between expectations and realizations of economic fundamentals. Such a component is a function of market volatility, a proxy which represents well how new information is processed. The model parameters are estimated over a tranquil period (2000-2007) and then, in keeping with a substantial stream of literature on the topic, they are kept unchanged over the more recent and more turbulent period (2008-2015). We apply our proc...
The issue of divergence of sovereign spreads in the Euro area, following the deep financial crisis initiated in 2008 can only in part be related to the stability of the institutional agreements behind the common currency. There is a... more
The issue of divergence of sovereign spreads in the Euro area, following the deep financial crisis initiated in 2008 can only in part be related to the stability of the institutional agreements behind the common currency. There is a widespread debate as of how spreads signal a justifiable credit risk differential within the area, or, rather, reflect irrational fears and subjective and biased reasoning. In this paper we suggest a way to filter out of the observed spreads a component which we dub physiological, which is the reflection of the reaction to difference between expectations and realizations of economic fundamentals. Such a component is a function of market volatility, a proxy which represents well how new information is processed. The model parameters are estimated over a tranquil period (2000–2007) and then, in keeping with a substantial stream of literature on the topic, they are kept unchanged over the more recent and more turbulent period (2008–2015). We apply our procedure on nine Euro area countries and the US. The difference between observed and predicted values is what we label excess fears. As a result, the actual spread is much higher than it should be using as a reference a physiological view where news on macroeconomic fundamentals do indeed induce a reaction by the markets, but that this reaction was excessive when compared to what similar episodes had generated in the past.
