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Do (German) State Bond Markets Discount Politics

Camillo Von Müller, Daniel Nadler & Sounman Hong

abstract To what extent do bond market reactions to an unexpected deficit shock depend
on state-specific politics? To answer this question, we calculate German state bond
spreads over government benchmark paper using information from Datastream for
the period 2006-2010. We test for a variety of institutional and political factors.
We find evidence that investors base risk perceptions on state specific economic
and institutional characteristics. Further, in left-leaning Eastern German states, an
increase in unexpected deficit shock had a greater negative effect on a state’s risk.
JEL Codes: E62, G18, G24, H71, H72, H74, H76, H77, N24, and P43
   
type working paper (Deutsch)
   
keywords Bond markets, financial crisis, fiscal debt, government finances, political economy
   
date of appearance 2012
series title Harvard University PEPG Research Papers
review internal review
   
citation von Müller, C., Nadler, D., & Hong, S. . (2012). Do (German) State Bond Markets Discount Politics. Harvard University PEPG Research Papers. Cambridge, MA.