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Sovereign debt spreads in EMU: The time-varying role of fundamentals and market distrust

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  • Paniagua, Jordi
  • Sapena, Juan
  • Tamarit, Cecilio

Abstract

This paper provides further analysis on the determinants of sovereign debt spreads for peripheral Eurozone countries since the start of EMU, paying special attention to episodes that characterized the global financial crisis aftermath starting in 2007. More specifically, the purpose of our research is to disentangle the role of fundamental variables and market perception about variations on risk in order to explain the evolution of sovereign spreads in EMU during the recent crisis. Our results, in line with previous literature, show the importance of three groups of observable variables, namely, changes in risk-aversion of creditors, fiscal indebtedness and liquidity variables. In addition, our model includes unobserved components that are estimated through the Kalman filter as time-varying deviation from fixed-mean parameters of spread determinants. This shows the importance of expectations (market sentiments), amplifying (or reducing) the relative importance of the spread determinants over time through the time-varying behavior of the parameters around their steady-state estimates.

Suggested Citation

  • Paniagua, Jordi & Sapena, Juan & Tamarit, Cecilio, 2017. "Sovereign debt spreads in EMU: The time-varying role of fundamentals and market distrust," Journal of Financial Stability, Elsevier, vol. 33(C), pages 187-206.
    • Handle: RePEc:eee:finsta:v:33:y:2017:i:c:p:187-206
    DOI: 10.1016/j.jfs.2016.06.004
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    7. Singh, Manish K. & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2021. "Quantifying sovereign risk in the euro area," Economic Modelling, Elsevier, vol. 95(C), pages 76-96.
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    More about this item

    Keywords

    Sovereign bond spreads; Contagion; Euro area; Kalman filter;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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