Government Bond Spreads: An Application of GAMLSS

Government bond yield differentials are of particular importance for policy makers due to the sheer magnitude of (nominal) government debt, which is usually serviced through the issuing of government bonds. In this paper we examine the differences between yields-to-maturity of euro denominated government bonds with similar characteristics (hereafter yield differences) issued by EMU member countries. In particular, we utilize high frequency data to examine the empirical determinants of the yield differences between Greece's and Germany's euro denominated (benchmark) government bonds. The analysis will be conducted using a (relatively) new and highly sophisticated statistical methodology which is Generalized Adaptive Models, Location, Scale and Shape (GAMLSS). GAMLSS models are semi-parametric and allow for a greater flexibility which is necessary for financial data and therefore will lead to a model(s) which are more precise and robust. This paper is one of the first to incorporate GAMLSS in the financial literature.