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Modeling euro area bond yields using a time-varying factor model

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  • Lo Duca, Marco
  • Adam, Tomáš

Abstract

In this paper, we study the dynamics and drivers of sovereign bond yields in euro area countries using a factor model with time-varying loading coefficients and stochastic volatility, which allows for capturing changes in the pricing mechanism of bond yields. Our key contribution is exploring both the global and the local dimensions of bond yield determinants in individual euro area countries using a time-varying model. Using the reduced form results, we show decoupling of periphery euro area bond yields from the core countries yields following the financial crisis and the scope of their subsequent re-integration. In addition, by means of the structural analysis based on identification via sign restrictions, we present time varying impulse responses of bond yields to EA and US monetary policy shocks and to confidence shocks. JEL Classification: C11, G01, E58

Suggested Citation

  • Lo Duca, Marco & Adam, Tomáš, 2017. "Modeling euro area bond yields using a time-varying factor model," Working Paper Series 2012, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172012
    Note: 452517
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp2012.en.pdf
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    Cited by:

    1. Samir Kadiric, 2020. "The determinants of sovereign risk premiums in the UK and the European government bond market: The impact of Brexit," EIIW Discussion paper disbei271, Universitätsbibliothek Wuppertal, University Library.
    2. Samir Kadiric, 2022. "The determinants of sovereign risk premiums in the UK and the European government bond market: the impact of Brexit," International Economics and Economic Policy, Springer, vol. 19(2), pages 267-298, May.

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    More about this item

    Keywords

    bayesian estimation; bond yield; factor model; sovereign debt crisis; stochastic volatility;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G01 - Financial Economics - - General - - - Financial Crises
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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