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On the time-varying relationship between EMU sovereign spreads and their determinants

  • Afonso, António
  • Arghyrou, Michael G.
  • Bagdatoglou, George
  • Kontonikas, Alexandros

We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999 – August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly timevarying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads’ determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves.

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File URL: http://repo.sire.ac.uk/handle/10943/474
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-47.

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Date of creation: 2013
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Handle: RePEc:edn:sirdps:474
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  1. De Santis, Roberto A., 2012. "The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal," Working Paper Series 1419, European Central Bank.
  2. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006. "Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market," NBER Working Papers 12376, National Bureau of Economic Research, Inc.
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  4. D’Agostino, Antonello & Ehrmann, Michael, 2014. "The pricing of G7 sovereign bond spreads – The times, they are a-changin," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 155-176.
  5. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers 388, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  6. Arghyrou, Michael G & Kontonikas, Alexandros, 2010. "The EMU sovereign-debt crisis: Fundamentals, expectations and contagion," Cardiff Economics Working Papers E2010/9, Cardiff University, Cardiff Business School, Economics Section.
  7. David F. Hendry & Carlos Santos, 2005. "Regression Models with Data-based Indicator Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(5), pages 571-595, October.
  8. Kerstin Bernoth & Burcu Erdogan, 2010. "Sovereign Bond Yield Spreads: A Time-Varying Coefficient Approach," Discussion Papers of DIW Berlin 1078, DIW Berlin, German Institute for Economic Research.
  9. Arghyrou, Michael G & Tsoukalas, John D., 2010. "The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes," Cardiff Economics Working Papers E2010/3, Cardiff University, Cardiff Business School, Economics Section.
  10. António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers Department of Economics 2012/36, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  11. Christian Aßmann & Jens Boysen-Hogrefe, 2012. "Determinants of government bond spreads in the euro area: in good times as in bad," Empirica, Springer, vol. 39(3), pages 341-356, August.
  12. Caggiano, Giovanni & Greco, Luciano, 2012. "Fiscal and financial determinants of Eurozone sovereign spreads," Economics Letters, Elsevier, vol. 117(3), pages 774-776.
  13. Carlo Favero & Alessandro Missale, 2011. "Sovereign spreads in the Euro Area. Which prospects for a Eurobond?," Working Papers 424, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Clive Granger & Namwon Hyung & Yongil Jeon, 2001. "Spurious regressions with stationary series," Applied Economics, Taylor & Francis Journals, vol. 33(7), pages 899-904.
  15. repec:ags:aaea07:387 is not listed on IDEAS
  16. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  17. Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," CEPR Discussion Papers 8679, C.E.P.R. Discussion Papers.
  18. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 191-240, 04.
  19. Miguel A. Segoviano Basurto & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads; Global Risk Aversion, Contagion or Fundamentals?," IMF Working Papers 10/120, International Monetary Fund.
  20. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  21. Carlo Favero & Marco Pagano & Ernst-Ludwig von Thadden, 2007. "How Does Liquidity Affect Government Bond Yields?," Working Papers 323, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  22. Paul De Grauwe & Yuemei Ji, 2012. "Mispricing of Sovereign Risk and Macroeconomic Stability in the Eurozone," Journal of Common Market Studies, Wiley Blackwell, vol. 50(6), pages 866-880, November.
  23. repec:ags:aaea07:423 is not listed on IDEAS
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