Euro Area Sovereign Bond Spreads, Risk Aversion & Monetary Policy

Sammanfattning: This paper provides a framework to disentangle the effects of uncertainty and risk aversion on Euro area sovereign bond yields vis-à-vis Germany, which were often confounded in previous studies. In a second step, the impact of European monetary policy on spreads through its impact on risk aversion is estimated. The background of this investigation is the reduction of spreads after Mario Draghi's OMT announcement in 2012: To what extent did the ECB lower spreads by increasing market participants' willingness to take on risks? The results indicate that risk aversion was a more important factor than uncertainty. The effect of monetary policy on spreads via risk aversion however is ambiguous at best and highly sensitive to the model specification and measurement of the policy stance.