Pricing Sovereign Yield Spreads in the Euro Area: Fundamentals, Market Sentiment and Institutional Change.

Sammanfattning

Over the past two decades, European 10-year sovereign bond yield spreads relative to German bunds have experienced substantial and heterogeneous fluctuations, with the global financial crisis and the COVID-19 pandemic generating distinct market reactions. This thesis examines the importance of country-specific macroeconomic fundamentals and common risk factors in explaining these spreads over the period 2003–2025. The analysis applies a dynamic panel ARDL framework estimated with the Pooled Mean Group estimator to capture both long-run level relationships and short-run dynamics. The findings indicate weaker support for country-specific fundamentals than suggested by much of the existing literature, while common risk sentiment appears to be particularly important in the short-run dynamics of yield spreads. Further analysis provides preliminary evidence that the European Central Bank’s role as an institutional backstop may have altered how sovereign risk is priced within the EMU, particularly during crisis periods. Overall, the study highlights the need for further empirical work on whether the pricing of euro area sovereign spreads has undergone a structural shift.