Thursday, 25 March 2010: 18:05
The introduction of the European Monetary Union was expected to be accompanied with a (virtual) elimination of the yield differences (spreads) of government bonds with similar characteristics. In this paper we examine the medium term driving factors of the yield differentials between Greece's and Germany's government bonds. Our main goal is to distinguish the liquidity factors from the credit risk component regarding these differentials. Through the use of quarterly data we find that these yield differences are driven by an international risk factor. Furthermore, the credit risk factor, which we proxy with via debt-to-GDP ratios, does not seem to have any effect on these spreads.