Determinants of CEE government bond spreads and contagion between 2001-2014

Abstract

This paper analyses the pricing of sovereign risk and contagion during the crises in the Central and Eastern European countries. Panel data are used to estimate the determinants of government bond spreads in three different time periods: before the crisis, during the global fi nancial crisis, and during the European debt crisis. The econometric model includes interactions between the explanatory variables and the crisis dummies. This specifi cation enables the coeffi cients to change during the crises. The empirical analysis confi rms a statistically signifi cant relationship between sovereign risk and macroeconomic fundamental variables. Additionally, the results suggest an increase in the importance of macroeconomic fundamentals during the fi nancial crisis. The analysis also supports that sovereign credit ratings and exchange rate risk have a signifi cant impact on government bond spreads.