Risk Premiums in Slovak Government Bonds

Abstract

We study risk premiums in Slovak government bonds. We focus on the country-specific part of yieldswhich we associate with the spread to overnight-indexed swaps. In the period 2009-2015, we decomposethe term structure of spreads to credit risk premium, liquidity premium, safety/convenience demand, andsegmentation effects. While the level of the term structure of spreads is mostly related to sovereigncredit risk, non-default components are related to the second principal component of spreads. We alsoidentify a siezable effect of public sector purchase programme conducted by the European Central Bankwith a magnitude in excess of 60 basis points for the ten-year bond. To study determinants of spreadsin 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 ofspread variation.