Publication: Towards a common European monetary union risk free rate
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2009-09
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National Bureau of Economic Research
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Abstract
A common European bond would yield a common European Monetary Union risk free rate. We present
tentative estimates of this common risk free for the European Monetary Union countries from 2004
to 2009 using variables motivated by a theoretical portfolio selection model. First, we analyze the
determinants of EMU sovereign yield spreads and find significant effects of the credit quality, macro,
correlation, and liquidity variables. However, their effects are different before and after the current
financial crisis, being stronger in the latter period. Robustness tests with different data frequencies,
benchmarks, liquidity variables, cross section regressions and balanced panels confirm the initial results.
We propose four different estimates of the common risk free rate and show that, in most cases, this
common rate could imply savings in borrowing costs for all the countries involved.
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Keywords
Euro government bonds, Credit quality, Liquidity, Macro factors
Bibliographic citation
NBER working paper series, v. 15353, 2009