Risk Premiums in Slovak Government Bonds

In the period 2009-2015, we decompose the term structure of spreads to credit risk premium, liquidity premium, safety/convenience demand, and segmentation effects. While the level of the term structure of spreads is mostly related to sovereign credit risk, non-default components are related to the second principal component of spreads.

We also identify a siezable effect of public sector purchase programme conducted by the European Central Bank with a magnitude in excess of 60 basis points for the ten-year bond. To study determinants of spreads in a longer sample 2000-2015, we construct credit spreads from international euro-denominated bonds. We find that debt-to-GDP ratio together with global financial variables explain a substantial fraction of spread variation.

Keywords: Risk premiums, yield curve models, sovereign credit risk, liquidity

JEL Classification: F3, G1, G17