The Role of Macroeconomic Variables in Sovereign Risk

Abstract

The sovereign debt market has gathered a lot of attention post the global financial recession therefore it is very important to study how the countries of the eurozone countries can be shielded from all internal and external risks. This can be achieved by examining the macroeconomic determinants of the sovereign risk. Based on the results of the panel regression, it becomes evident which financial indicators are contributing to the sovereign risk. In terms of the stochastic properties, when homogeneity is assumed among the cross-sectional units, all the variables appeared to be level stationary except for the total government bond yield. However, when heterogeneity is assumed among the countries, variables such total government bond yield, GDS as a percentage of GDP, total credit to private sector, employment as a ratio to total GDP, and bank credit are level none stationary. Consequently, these findings will help identify the variables that can be used to approximate the movement of the government bond yield.