TY  - JOUR
AU  - Favero,Carlo
AU  - Giavazzi,Francesco
AU  - Spaventa,Luigi
TI  - High Yields: The Spread on German Interest Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5408
PY  - 1998
Y2  - February 1998
UR  - http://www.nber.org/papers/w5408
L1  - http://www.nber.org/papers/w5408.pdf
N1  - Author contact info:
Carlo Favero
Department of Finance
Bocconi University and IGIER
Via Röntgen, 1
20136 Milano, ITALY
E-Mail: carlo.favero@uni-bocconi.it

Francesco Giavazzi
Universita' Bocconi and IGIER
Via Guglielmo Rontgen, 1
Milan 20136
ITALY
Tel: 0039-02-5836-3304
Fax: 0039-02-5836-3302
E-Mail: francesco.giavazzi@unibocconi.it
AB  - 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.
ER  -