AbstractsBusiness Management & Administration

Testing the impact of fiscal, financial, and political variables on European bond spreads

by Vivien Djiambou

Institution: Université Catholique de Louvain
Year: 2016
Keywords: Public debt; Lack of trust in parliament; Political risk; Lack of trust in political parties; Real GDP growth; Sovereign bond spread; Stock market return; Lack of trust in the government; Volatility index; Primary balance
Posted: 02/05/2017
Record ID: 2133479
Full text PDF: http://hdl.handle.net/2078.1/174859


The general theme covered in this dissertation is “Testing the impact of fiscal, financial, and political variables on European bond spreads”. We argue that deteriorations in fiscal and political variables during bad economic conditions and increased volatility in stock markets have been major drivers of the rise in bond spreads in various European countries. This allows us, to some extent, to apply an innovative approach when analyzing these internal factors. To the best of our knowledge, there are no existing research in the literature on European bond spreads, that apply a non-linear threshold method to explain how the impact of a change in government debt and in political risk on bond spread, depends on the level of government debt, real GDP growth, political risk, stock market volatility, and membership to the euro area. Moreover, in the literature analyzing the drivers of bond spreads, political risk variables usually considered are international political risks rather than country-specific political risks, that capture the deterioration of the domestic political situation. In the first chapter, we propose a framework that captures the impact of public debt ratios during periods of bad economic conditions. We used a fixed effect panel approach to show that deterioration of public debts are significant during bad economic conditions, in contrast to periods of normal economic conditions in euro area countries. In the second chapter, we extend the analysis by considering the state of financial systems and economic conditions. This allows us to determine endogenously and exogenously the threshold levels of public debt and volatility index. In the third chapter, we further extend our analysis to consider country-specific political risk variables. In particular, we devote much effort to determine the drivers of bond spreads in various European groups using the dynamic panel threshold methodology. (ECGE - Sciences économiques et de gestion)  – UCL, 2016 Advisors/Committee Members: UCL - SSH/ILSM - Research Institute of Louvain School of Management, UCL - Louvain School of Management, Catherine, D'Hondt, Etienne, Farvaque, Mikael, Petitjean, Marcel, Gerard, Gilson, Nathalie, van Aarle, Bas.