Spread the news: The impact of news on the European sovereign bond markets during the crisis

We investigate how “news” affected domestic interest spreads vis-à-vis Germany and how it propagated to other countries during the recent crisis period, thereby distinguishing between the so-called GIIPS countries and other European countries. We make original use of the Eurointelligence newsflash to construct news variables based on the amount of news that is released on a country on a given date. We find that more news on average raises the domestic interest spread of GIIPS countries since September 2009. In addition, we find that it leads to an increase in the interest spreads of other GIIPS countries. The magnitude of this effect is related to cross-border bank holdings. A split of news into bad and good news shows that the upward pressure on domestic and foreign interest spreads is driven by bad news. We also find spill-overs of bad news from GIIPS countries onto non-GIIPS countries. However, the magnitude of these spill-overs is substantially smaller than that to other GIIPS countries.

Highlights

► We use the Eurointelligence newsflash to construct news variables. ► More news raises interest spreads of GIIPS countries since September 2009. ► There is both a domestic and a foreign effect. ► The size of the cross-border effect is related to cross-border bank holdings. ► The upward pressure on interest spreads is driven by bad news.