What are the driving factors behind the rise of spreads and CDS of euro-area sovereign bonds? A FAVAR model for Greece and Ireland
AbstractThis paper examines the dynamics of selected euro-area sovereign bonds by employing a factor augmenting vector autoregressive (FAVAR) model for the first time in the literature. This methodology identifies the underlying transmission mechanisms of several factors, and in particular, market liquidity and credit risk. Departing from the classical vector autoregressive (VAR) models allows us to relax limitations regarding the choice of variables that could drive spreads and CDS of euro-area sovereign debts. The results show that liquidity, credit risk and flight to quality drive both spreads and CDS of five years maturity over swaps for Greece and Ireland in recent years. Greece, in particular, is facing an elastic demand for its sovereign bonds that further stretches liquidity. Moreover, in illiquid debt markets spreads continue to follow a steep upward trend which is expected to have certain adverse implications for financial stability. We also observe a negative feedback effect from counterparty credit risk.
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Bibliographic InfoArticle provided by Inderscience Enterprises Ltd in its journal Int. J. of Economics and Business Research.
Volume (Year): 7 (2014)
Issue (Month): 1 ()
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Web page: http://www.inderscience.com/browse/index.php?journalID==310
sovereign debt crisis; spreads; credit default swap; CDS; FAVAR model; Greece; Ireland; Euro Zone; sovereign bonds; factor augmenting vector autoregressive; market liquidity; credit risk.;
Other versions of this item:
- Nicholas Apergis & Emmanuel Mamatzakis, 2012. "What Are the Driving Factors behind the Rise of Spreads and CDSs of Euro-area Sovereign Bonds? A FAVAR Model for Greece and Ireland," Economics Working Paper Archive wp_720, Levy Economics Institute.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G00 - Financial Economics - - General - - - General
- G01 - Financial Economics - - General - - - Financial Crises
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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ERIM Report Series Research in Management
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