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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.

Suggested Citation

  • Boysen-Hogrefe, Jens, 2013. "A dynamic factor model with time-varying loadings for euro area bond markets during the debt crisis," Economics Letters, Elsevier, vol. 118(1), pages 50-54.
  • Handle: RePEc:eee:ecolet:v:118:y:2013:i:1:p:50-54
    DOI: 10.1016/j.econlet.2012.09.017
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    References listed on IDEAS

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    1. Christian Aßmann & Jens Boysen-Hogrefe, 2012. "Determinants of government bond spreads in the euro area: in good times as in bad," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 39(3), pages 341-356, August.
    2. 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.
    3. 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.
    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. 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.
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    Citations

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    Cited by:

    1. Lo Duca, Marco & Adam, Tomáš, 2017. "Modeling euro area bond yields using a time-varying factor model," Working Paper Series 2012, European Central Bank.
    2. António Afonso & João Tovar Jalles, 2017. "Quantitative Easing and Sovereign Yield Spreads: Euro-Area Time-Varying Evidence," Working Papers REM 2017/20, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    3. 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.

    More about this item

    Keywords

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

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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