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Regime-dependent sovereign risk pricing during the euro crisis

Author

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  • Delatte, Anne-Laure
  • Fouquau, Julien
  • Portes, Richard

Abstract

Previous work has documented a greater sensitivity of long-term government bond yields to fundamentals in Euro area stress countries during the euro crisis, but we know little about the driver(s) of regimeswitches. Our estimates based on a panel smooth threshold regression model quantify and explain them: 1) investors have penalized a deterioration of fundamentals more strongly from 2010 to 2012; 2) a key indicator of regime switch is the premium of the financial credit default swap index: the higher the bank credit risk, the higher the extra premium on fundamentals; 3) after ECB President Draghi’s speech in July 2012, it took one year to restore the non-crisis regime and suppress the extra premium. JEL Classification: E44, F34, G12, H63, C23

Suggested Citation

  • Delatte, Anne-Laure & Fouquau, Julien & Portes, Richard, 2016. "Regime-dependent sovereign risk pricing during the euro crisis," ESRB Working Paper Series 9, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:20169
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    More about this item

    Keywords

    CDS indices; European sovereign crisis; Panel Smooth Threshold Regression Models;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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