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

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

Abstract

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://hdl.handle.net/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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Keywords: euro area; crisis; spreads; time-series analysis; time-varying relationship;

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Find related papers by JEL classification:
  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
  • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
  • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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  1. Bernoth, Kerstin & Erdogan, Burcu, 2012. "Sovereign bond yield spreads: A time-varying coefficient approach," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 639-656.
  2. Arghyrou, Michael G. & Kontonikas, Alexandros, 2012. "The EMU sovereign-debt crisis: Fundamentals, expectations and contagion," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 658-677.
  3. 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.
  4. 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.
  5. Michael G. Arghyrou & John D. Tsoukalas, 2010. "The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes," CESifo Working Paper Series 3266, CESifo Group Munich.
  6. David Hendry & Hans-Martin Krolzig, 2003. "The Properties of Automatic Gets Modelling," Economics Papers 2003-W14, Economics Group, Nuffield College, University of Oxford.
  7. António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers 2012_14, Business School - Economics, University of Glasgow.
  8. Aßmann, Christian & Boysen-Hogrefe, Jens, 2009. "Determinants of government bond spreads in the Euro Area: in good times as in bad," Kiel Working Papers 1548, Kiel Institute for the World Economy (IfW).
  9. Granger, Clive W.J. & Hyung, Namwon & Jeon, Yongil, 1998. "Spurious Regressions with Stationary Series," University of California at San Diego, Economics Working Paper Series qt7r3353t8, Department of Economics, UC San Diego.
  10. David Hendry & Carlos Santos, 2003. "Regression Models with Data-based Indicator Variables," Economics Series Working Papers 2004-W04, University of Oxford, Department of Economics.
  11. D'Agostino, Antonello & Ehrmann, Michael, 2012. "The pricing of G7 sovereign bond spreads – the times, they are a-changin," MPRA Paper 40604, University Library of Munich, Germany.
  12. 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 2008 - 2015 388, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  13. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  14. repec:edn:sirdps:423 is not listed on IDEAS
  15. 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.
  16. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
  17. 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.
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  19. 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.
  20. 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.
  21. 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.
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  23. Caggiano, Giovanni & Greco, Luciano, 2012. "Fiscal and financial determinants of Eurozone sovereign spreads," Economics Letters, Elsevier, vol. 117(3), pages 774-776.
  24. 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.
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