A Behavioural Model of European Bond Markets
Professor of Economics at ESB Business School, Reutlingen University ESB Business School, Reutlingen University, Germany
- *Corresponding Author:
- Bodo Herzog
Professor of Economics at ESB Business School
Reutlingen University ESB Business School
Reutlingen University, Germany
E-mail: [email protected]
Received Date: March 24, 2014; Accepted Date: May 27, 2014; Published Date: June 06, 2014
Citation: Herzog B (2014) A Behavioural Model of European Bond Markets. J Stock Forex Trad 3:126. doi: 10.4172/2168-9458.1000126
Copyright: 2014 Herzog B. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
This paper builds a new theory of euro area sovereign bond markets. The theory explains the anomalous bond pricing and increasing spreads during the ‘Euro-Crisis’. I show that the malfunctioning of euro area bond markets is triggered by asymmetric information and weak reputation in economic and fiscal policy. Both factors trigger a standard bond market to turn into turmoil. In the end, those markets are prone to self-fulfilling bubbles due to animal spirits. Consequently, mispricing of sovereign debt is inherent in the Eurozone and creates more macroeconomic instability than in a stand-alone country.