Title: European spreads at the interest rate lower bound
Authors: Laura Coroneo - University of York (United Kingdom) [presenting]
Sergio Pastorello - University of Bologna (Italy)
Abstract: The effect of the interest rate lower bound on long-term sovereign bond spreads in the Euro area is analyzed. We specify a joint shadow rate model for the risk-free, the German and the Italian yield curves. Results indicate that in 2012 the 10-year Italian sovereign spread with respect to Germany was constrained by the lower bound on interest rates by as much as 0.77\%. We show that this nonlinearity implies that, at the interest rate lower bound, long-term sovereign bond spreads are asymmetrically distributed, affected by changes in the lower bound and less informative about the sovereign risk. Shadow spreads, however, still provide reliable information.