6533b7d8fe1ef96bd126ab92

RESEARCH PRODUCT

Sovereign debt spreads in EMU: The time-varying role of fundamentals and market distrust

Jordi PaniaguaCecilio TamaritJuan Sapena

subject

MacroeconomicsDistrustCreditormedia_common.quotation_subject05 social sciencesMarket liquiditySovereigntyOrder (exchange)0502 economics and businessFinancial crisisEconomics050207 economicsSovereign debtGeneral Economics Econometrics and FinanceFinance050205 econometrics media_common

description

Abstract This paper provides further analysis on the determinants of sovereign debt spreads for peripheral Eurozone countries since the start of EMU, paying special attention to episodes that characterized the global financial crisis aftermath starting in 2007. More specifically, the purpose of our research is to disentangle the role of fundamental variables and market perception about variations on risk in order to explain the evolution of sovereign spreads in EMU during the recent crisis. Our results, in line with previous literature, show the importance of three groups of observable variables, namely, changes in risk-aversion of creditors, fiscal indebtedness and liquidity variables. In addition, our model includes unobserved components that are estimated through the Kalman filter as time-varying deviation from fixed-mean parameters of spread determinants. This shows the importance of expectations (market sentiments), amplifying (or reducing) the relative importance of the spread determinants over time through the time-varying behavior of the parameters around their steady-state estimates.

yearjournalcountryeditionlanguage
2017-12-01Journal of Financial Stability
https://doi.org/10.1016/j.jfs.2016.06.004