Torsten Arno Hantzsche (Nottingham) - Determinants of sub-sovereign bond yield spreads – The role of fiscal fundamentals and federal bail-out expectations

Date(s): Thursday 12th November 2015 (14:00-15:00)
Description: This week's speaker will be Torsten Arno Hantzsche from the University of Nottingham with "Determinants of sub-sovereign bond yield spreads – The role of fiscal fundamentals and federal bail-out expectations". We hope you will come along and support your colleague.

Abstract: Using a novel dataset for sub-sovereign governments including Australian states, Canadian provinces, Swiss cantons, German Länder, US states, Spanish communities, and Indian states, we investigate whether bond yield spreads are driven by bailout expectations and investors’ risk appetite rather than sub-sovereigns’ fundamentals related to default risk – across and within federations. We find that independent of the prevailing federal system fundamental factors and global risk aversion are both important drivers of sub-sovereign spreads. Within federations the willingness and capacity to bail out sub-sovereigns in financial difficulties determines whether fundamental factors are priced into spreads. In particular higher debt levels increase the willingness to bail out and hence reduce premia. Larger sub-sovereign entities and those whose central government faces borrowing constraints however pay larger premia as fundamentals worsen because the capacity of the federation as a whole to provide bailouts is reduced. Our findings are robust to alternative specifications which also control for liquidity risk.

Centre for Finance, Credit and Macroeconomics

Sir Clive Granger Building
University of Nottingham
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Nottingham, NG7 2RD

Enquiries: hilary.hughes@nottingham.ac.uk