IMPACT OF STOCK MARKET FORCES ON SOVEREIGN BOND YIELD SPREADS: EVIDENCE FROM EUROPEAN MONETARY UNION BEFORE AND DURING THE EUROPEAN DEBT CRISIS

Rumbidzai Mukonoweshuro, Plymouth Business School, University of Plymouth, U.K.
Stefan Berghausen, Plymouth Business School, University of Plymouth, U.K.

Published in

JOURNAL OF INTERNATIONAL FINANCE AND ECONOMICS
Volume 18, Issue 4, p69-92, December 2018

ABSTRACT

Focusing particularly on the stock market factors, this research study investigates the key determinants of the sovereign bond yield spreads within the European Monetary Union (EMU), before and during the European financial debt crisis. The econometric modelling multiple regression, stepwise analysis methodology has been successfully applied in this research study to identify the key stock market factors that influence the sovereign bond yield spreads within the EMU before and during the financial crisis. The research findings of this study suggests that both before and during the financial crisis the adverse change in price of the Euro STOXX 50 index is the key determinant of the sovereign bond yield spreads applicable to the majority of the countries within EMU. The adverse performance of the Euro STOXX 50 stock market index has a predictability property of higher sovereign bond yield spreads within the EMU both before and during the financial crisis. According to Chen et al (1986) shifts in stock market index tend to result from reacting sensitively to economic forces. Therefore, adverse shifts in Euro STOXX 50 index may result from adverse economic forces such as instabilities and risks within the economy. This study suggests that both before and during the European financial debt crisis the adverse shifts in Euro STOXX 50 index are associated with higher sovereign bond yield spreads within the European Monetary Union and this is particularly clearly noted for Italy, Ireland, Portugal and Greece.

Keywords

Sovereign bond yield spreads, European Monetary Union, European financial debt crisis, stock market


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