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A dynamic factor model with time-varying loadings for euro area bond markets during the debt crisis

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  • Boysen-Hogrefe, Jens

Abstract

The debt crisis in the euro area led to obvious changes in the structure of euro area bond markets. To model the process of disintegration that has taken place as a result of this crisis, this analysis uses a dynamic factor model with time-varying loadings and two factors. While some core countries load rather stably on one factor, this factor loses its impact on many peripheral countries over time. At least for some periods, countries that are affected by the debt crisis load highly on a second factor, especially Spain and Italy. Ireland, Portugal, and Greece, which all load highly on the second factor for some periods, show signs of decoupling at the current edge.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 118 (2013)
Issue (Month): 1 ()
Pages: 50-54

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Handle: RePEc:eee:ecolet:v:118:y:2013:i:1:p:50-54

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Bond markets; Euro crisis; Dynamic factor models; Time-varying loadings; Bayesian estimation;

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  1. Mardi Dungey & Vance L Martin & Adrian R Pagan, 2000. "A multivariate latent factor decomposition of international bond yield spreads," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 697-715.
  2. Carvalho, Carlos M. & Chang, Jeffrey & Lucas, Joseph E. & Nevins, Joseph R. & Wang, Quanli & West, Mike, 2008. "High-Dimensional Sparse Factor Modeling: Applications in Gene Expression Genomics," Journal of the American Statistical Association, American Statistical Association, vol. 103(484), pages 1438-1456.
  3. Bernoth, Kerstin & Erdogan, Burcu, 2012. "Sovereign bond yield spreads: A time-varying coefficient approach," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 639-656.
  4. Marco Del Negro & Christopher Otrok, 2008. "Dynamic factor models with time-varying parameters: measuring changes in international business cycles," Staff Reports 326, Federal Reserve Bank of New York.
  5. Christian Aßmann & Jens Hogrefe, 2009. "Determinants of government bond spreads in the Euro area – in good times as in bad," Kiel Working Papers 1548, Kiel Institute for the World Economy.
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Cited by:
  1. Antonakakis, Nikolaos, 2012. "Dynamic Correlations of Sovereign Bond Yield Spreads in the Euro zone and the Role of Credit Rating Agencies' Downgrades," MPRA Paper 43013, University Library of Munich, Germany.

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