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How are market preferences shaped? The case of sovereign debt of stressed euro-area countries

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  • Mamatzakis, Emmanuel
  • Tsionas, Mike G.

Abstract

This paper reveals the underlying market preferences for sovereign debt of distressed euro area countries. We employ a generalised flexible market loss, as it nests both the linear and the non-linear form, as a function of the ‘basis’, the difference between sovereign bond spread and the Credit Default Swap. Our evidence shows that market preferences lean towards pessimism for some countries, in particular Greece. Those preferences do not remain stable over time as they shift further towards pessimism post the Greek bail out in spring 2010. As part of sensitivity analysis we apply a multivariate loss function to account for contagion effects in forming market preferences among different sovereign bonds. We also examine the impact of specific financial and fiscal governance factors on market preferences. Our results suggest that the market closely monitor fiscal fundamentals so as to shape preferences.

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  • Mamatzakis, Emmanuel & Tsionas, Mike G., 2015. "How are market preferences shaped? The case of sovereign debt of stressed euro-area countries," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 106-116.
    • Handle: RePEc:eee:jbfina:v:61:y:2015:i:c:p:106-116
    DOI: 10.1016/j.jbankfin.2015.08.004
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    Cited by:

    1. Panagiotis Pegkas, 2018. "The Effect of Government Debt and Other Determinants on Economic Growth: The Greek Experience," Economies, MDPI, vol. 6(1), pages 1-19, February.
    2. Mamatzakis, Emmanuel & matousek, roman & vu, anh, 2019. "The interplay between problem loans and Japanese bank productivity," MPRA Paper 92960, University Library of Munich, Germany.
    3. Siddhartha S. Bora & Ani L. Katchova & Todd H. Kuethe, 2021. "The Rationality of USDA Forecasts under Multivariate Asymmetric Loss," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(3), pages 1006-1033, May.
    4. Mamatzakis, Emmanuel & Bagntasarian, Anna, 2019. "The nexus between underlying dynamics of bank capital buffer and performance," MPRA Paper 92961, University Library of Munich, Germany.

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    More about this item

    Keywords

    Euro area sovereign debt crisis; Spreads; CDS; Loss function;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G00 - Financial Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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