Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia

Arbeitspapier

We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected "creative" part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series 1 ; No. 2006,19

Classification and Topics

• Classification: Wirtschaft ; International Lending and Debt Problems ; Asset Pricing; Trading Volume; Bond Interest Rates ; Interest Rates: Determination, Term Structure, and Effects ; Fiscal Policy
• Subject: Risk premia ; government bond yields ; creative accounting ; stock-flow adjustments ; gimmickry ; transparency ; Haushaltsdefizit ; Öffentliche Schulden ; Bilanzpolitik ; Konvergenzkriterien ; EU-Stabilitätspakt ; Zinsdifferenz ; Länderrisiko ; Risikoprämie ; Öffentliche Anleihe ; Schätzung ; EU-Staaten

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bernoth, Kerstin ; Wolff, Guntram B.
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/19647
• Last update: 10.03.2025, 11:42 AM CET