We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads … divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk …

liquidity. The risk factors follow conditionally Gaussian processes, with drifts and variance-covariance matrices that are …

credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected … liquidity-related parts and into an expectation part and risk premiums. Our results shed new light on the effects of …

-driven. Our approach is consistent with the fact that sovereign default risk is not diversifiable, which gives rise to specific … risk premia that are incorporated in spreads. Once liquidity-pricing effects and risk premia are filtered out of the … spreads, we obtain estimates of the actual –or real-world– default probabilities. The latter turn out to be significantly …

. After having estimated the model using daily euro-area data, I explore the behaviour of risk premia at the short end of the … yield curve. These risk premia are neglected by the widely-used practice that consists in backing out market forecasts of …