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The determinants of sovereign credit spread changes in the Euro-zone

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  • Oliveira, Luís
  • Curto, José Dias
  • Nunes, João Pedro

Abstract

Using a database of Euro-denominated government bonds covering the period from January 2000 to December 2010, this paper provides an empirical analysis of the determinants of government credit spreads in the Euro-area. The analysis is divided into two sub-periods delimited by the global financial crisis that started in August 2007. We find evidence of a clear shift in the behavior of market participants from a convergence-trade expectation, based on market related factors, before August 2007, to one mainly driven by macroeconomic country-specific variables and an international common risk factor. There is no evidence of a significant role for the liquidity risk before or during the financial crisis period. Overall, our results give support to the Merton-type structural credit risk models and confirm that there are considerable similarities between the factors explaining the dynamics of the credit risk spreads and the factors driving the prices on the government bond markets.

Suggested Citation

  • Oliveira, Luís & Curto, José Dias & Nunes, João Pedro, 2012. "The determinants of sovereign credit spread changes in the Euro-zone," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 278-304.
  • Handle: RePEc:eee:intfin:v:22:y:2012:i:2:p:278-304
    DOI: 10.1016/j.intfin.2011.09.007
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    More about this item

    Keywords

    Credit risk; Structural models; Term structure of interest rates; Gaussian HJM multi-factor models;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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