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On the time-varying relationship between EMU sovereign spreads and their determinants

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  • António Afonso,
  • Michael G. Arghyrou,
  • George Bagdatoglou,
  • Alexandros Kontonikas

Abstract

We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999 – August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly time-varying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads’ determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves.

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File URL: http://pascal.iseg.utl.pt/~depeco/wp/wp052013.pdf
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Bibliographic Info

Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2013/05.

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Date of creation: Feb 2013
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Handle: RePEc:ise:isegwp:wp052013

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Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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Keywords: euro area; crisis; spreads; time-series analysis; time-varying relationship.;

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