NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

High Yields: The Spread on German Interest Rates

Carlo Favero, Francesco Giavazzi, Luigi Spaventa

NBER Working Paper No. 5408 (Also Reprint No. r2176)
Issued in January 1996
NBER Program(s):   IFM

This paper is a first attempt at evaluating the determinants of the total interest rate differentials on government bonds between high yielders, namely Italy, Spain, Sweden and Germany. In particular we address the question of the relative importance of local and global factors in the determination of such spreads. We identify and measure two components of total yield differentials: one due to expectations of exchange rate depreciation -- which we call the exchange rate factor -- another which reflects the market assessment of default risk. We propose and discuss a measure of the exchange rate factors and of the default risk premium based on interest rate swaps. Overall our investigation provides strong evidence in favor of the existence of a common trend for the Italian and Spanish spreads on Bunds, which is not shared by the Swedish spread. Such a trend is driven by international factors and is independent from country- specific shocks. Country-specific shocks are only relevant in explaining short term cycles around the common stochastic trend.

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Document Object Identifier (DOI): 10.3386/w5408

Published: Economic Journal, Vol. 107, no. 663 (July 1997).

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