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A macro-financial analysis of the euro area sovereign bond market

Author

Listed:
  • Hans Dewachter

    () (National Bank of Belgium, Research Department
    Center for Economic Studies, University of Leuven
    CESifo)

  • Leonardo Iania

    () (Louvain School of Management, Université Catholique de Louvain
    Center for Economic Studies, University of Leuven)

  • Marco Lyrio

    () (Insper Institute of Education and Research)

  • Maite de Sola Perea

    () (National Bank of Belgium, Research Department)

Abstract

We estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin, Priebsch, and Singleton (2013). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005-2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011.

Suggested Citation

  • Hans Dewachter & Leonardo Iania & Marco Lyrio & Maite de Sola Perea, 2014. "A macro-financial analysis of the euro area sovereign bond market," Working Paper Research 259, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201406-259
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    References listed on IDEAS

    as
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    Cited by:

    1. Afonso, António & Arghyrou, Michael G. & Gadea, María Dolores & Kontonikas, Alexandros, 2018. "“Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 1-30.
    2. Zaghini, Andrea, 2016. "Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?," Journal of Financial Stability, Elsevier, vol. 23(C), pages 51-61.
    3. repec:kap:jfsres:v:54:y:2018:i:1:d:10.1007_s10693-016-0264-z is not listed on IDEAS
    4. De Santis, Roberto A., 2015. "A measure of redenomination risk," Working Paper Series 1785, European Central Bank.
    5. Valerio Filoso, Valerio & Panico, Carlo & Papagni, Erasmo & Francesco, Purificato & Vázquez Suarez, Marta, 2016. "Causes and timing of the European debt crisis: An econometric evaluation," MPRA Paper 75847, University Library of Munich, Germany.
    6. B. De Backer, 2015. "Decomposition of the dynamics of sovereign yield spreads in the euro area," Economic Review, National Bank of Belgium, issue i, pages 54-75, June.
    7. Zaghini, Andrea, 2017. "A tale of fragmentation: Corporate funding in the euro-area bond market," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 59-68.
    8. Garcí­a, Juan Angel & Werner, Sebastian E. V., 2016. "Bond risk premia, macroeconomic factors and financial crisis in the euro area," Working Paper Series 1938, European Central Bank.
    9. repec:eee:ecmode:v:70:y:2018:i:c:p:525-542 is not listed on IDEAS
    10. Sören Radde & Cristina Checherita-Westphal & Wei Cui, 2015. "Government Bond Liquidity and Sovereign-Bank Interlinkages," SFB 649 Discussion Papers SFB649DP2015-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    11. Moisă Altăr & Alexandru-Adrian Cramer & Adam-Nelu Altăr-Samuel, 2015. "Sovereign Financial Asset Market Linkages across Europe During the Euro Zone Debt Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 29-49, December.
    12. António Afonso & Frederico Silva Leal, 2017. "Sovereign yield spreads in the EMU: crisis and structural determinants," Working Papers Department of Economics 2017/09, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.

    More about this item

    Keywords

    Euro area sovereign bonds; yield spread decomposition; unspanned macro factors; fair spreads;

    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
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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