Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds?
Autor(a) principal: | |
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Data de Publicação: | 2022 |
Outros Autores: | , |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10071/26997 |
Resumo: | We examine the relationship between the risk premium markets demand to hold the Treasury Bonds of a given country and the sustainability of the public finances of the country. We inquire to what extent do markets use the dynamic evolution of the public-debt-to-gdp ratio as an indication of the likelihood of a public debt default. Specifically, our empirical research design involves the following steps: (i) we use the dynamic equation of the public-debt-to-gdp ratio to build forecasts of future values of this ratio in the eurozone countries; (ii) we then use these forecasts in a regression to see how important they are to explain the risk premium implicit in the treasury bond yields. We find that projections of future values of the public-debt-to-gdp ratio do impact current 10 year bond spreads. According to our regressions, markets seem to give more weight to forecasts with a horizon smaller than 10 years. Our results suggest that agents use a relatively simple mechanism to forecast the public debt-to-gdp ratio, a mechanism which can be used while updated forecasts from international organizations are not yet available. On the other hand, according to our estimations, euro area sovereign debt markets ceased to significantly discriminate countries based on their public debt prospects after the 2012 ‘Whatever It Takes” speech and the announcement of the Outright Monetary Transactions (OMT) program—suggesting that these events had a significant calming effect on the markets. |
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Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds?Risk premiumTreasury bondsSustainability of public fnancesPublic-debt-to-gdp ratioWe examine the relationship between the risk premium markets demand to hold the Treasury Bonds of a given country and the sustainability of the public finances of the country. We inquire to what extent do markets use the dynamic evolution of the public-debt-to-gdp ratio as an indication of the likelihood of a public debt default. Specifically, our empirical research design involves the following steps: (i) we use the dynamic equation of the public-debt-to-gdp ratio to build forecasts of future values of this ratio in the eurozone countries; (ii) we then use these forecasts in a regression to see how important they are to explain the risk premium implicit in the treasury bond yields. We find that projections of future values of the public-debt-to-gdp ratio do impact current 10 year bond spreads. According to our regressions, markets seem to give more weight to forecasts with a horizon smaller than 10 years. Our results suggest that agents use a relatively simple mechanism to forecast the public debt-to-gdp ratio, a mechanism which can be used while updated forecasts from international organizations are not yet available. On the other hand, according to our estimations, euro area sovereign debt markets ceased to significantly discriminate countries based on their public debt prospects after the 2012 ‘Whatever It Takes” speech and the announcement of the Outright Monetary Transactions (OMT) program—suggesting that these events had a significant calming effect on the markets.Springer2023-08-12T00:00:00Z2022-01-01T00:00:00Z20222023-01-04T17:07:30Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articleapplication/pdfhttp://hdl.handle.net/10071/26997eng0340-874410.1007/s10663-022-09547-8Lagoa, S.Leão, E.Bhimjee, D.info:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-11-09T17:58:37Zoai:repositorio.iscte-iul.pt:10071/26997Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T22:30:32.698771Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? |
title |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? |
spellingShingle |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? Lagoa, S. Risk premium Treasury bonds Sustainability of public fnances Public-debt-to-gdp ratio |
title_short |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? |
title_full |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? |
title_fullStr |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? |
title_full_unstemmed |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? |
title_sort |
Dynamics of the public-debt-to-gdp ratio: Can it explain the risk premium of treasury bonds? |
author |
Lagoa, S. |
author_facet |
Lagoa, S. Leão, E. Bhimjee, D. |
author_role |
author |
author2 |
Leão, E. Bhimjee, D. |
author2_role |
author author |
dc.contributor.author.fl_str_mv |
Lagoa, S. Leão, E. Bhimjee, D. |
dc.subject.por.fl_str_mv |
Risk premium Treasury bonds Sustainability of public fnances Public-debt-to-gdp ratio |
topic |
Risk premium Treasury bonds Sustainability of public fnances Public-debt-to-gdp ratio |
description |
We examine the relationship between the risk premium markets demand to hold the Treasury Bonds of a given country and the sustainability of the public finances of the country. We inquire to what extent do markets use the dynamic evolution of the public-debt-to-gdp ratio as an indication of the likelihood of a public debt default. Specifically, our empirical research design involves the following steps: (i) we use the dynamic equation of the public-debt-to-gdp ratio to build forecasts of future values of this ratio in the eurozone countries; (ii) we then use these forecasts in a regression to see how important they are to explain the risk premium implicit in the treasury bond yields. We find that projections of future values of the public-debt-to-gdp ratio do impact current 10 year bond spreads. According to our regressions, markets seem to give more weight to forecasts with a horizon smaller than 10 years. Our results suggest that agents use a relatively simple mechanism to forecast the public debt-to-gdp ratio, a mechanism which can be used while updated forecasts from international organizations are not yet available. On the other hand, according to our estimations, euro area sovereign debt markets ceased to significantly discriminate countries based on their public debt prospects after the 2012 ‘Whatever It Takes” speech and the announcement of the Outright Monetary Transactions (OMT) program—suggesting that these events had a significant calming effect on the markets. |
publishDate |
2022 |
dc.date.none.fl_str_mv |
2022-01-01T00:00:00Z 2022 2023-08-12T00:00:00Z 2023-01-04T17:07:30Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10071/26997 |
url |
http://hdl.handle.net/10071/26997 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
0340-8744 10.1007/s10663-022-09547-8 |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.publisher.none.fl_str_mv |
Springer |
publisher.none.fl_str_mv |
Springer |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
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Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
instacron_str |
RCAAP |
institution |
RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
collection |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
repository.name.fl_str_mv |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
repository.mail.fl_str_mv |
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1799134867786563584 |