Effects of Eurobonds: A stochastic sovereign debt sustainability analysis for Portugal,Ireland and Greece

This paper assesses the impact of Eurobonds on sovereign debt dynamics for selected European member states (Greece, Ireland and Portugal). For each member state, we produce sovereign debt fan charts of (i) a baseline scenario (no Eurobonds) and (ii) a Full-Fledged Eurobond introduction. The key building blocks of our methodology are (i) a debt framework (which embeds the traditional recursive debt equation), (ii) a vector autoregressive model to take into account and parametrise macroeconomic uncertainty and (iii) a fiscal reaction function. Conditional on the absence of moral hazard, we find Eurobonds to be a good instrument to absorb macroeconomic shocks and to diminish uncertainty over future debt forecasts; for Ireland and Portugal, we find debt to be 20 percentage points lower than under our baseline scenario, by 2020.     

Global financial crisis and dependence risk analysis of sector portfolios: a vine copula approach

We use regular vine (r-vine), canonical vine (c-vine) and drawable vine (d-vine) copulas to examine the dependence risk characteristics of three 20-stock portfolios from the retail, manufacturing and gold-mining equity sectors of the Australian market in periods before, during and after the 2008–2009 global financial crisis (GFC). Our results indicate that the retail portfolio is less risky than the manufacturing counterpart in the crisis period, while the gold-mining portfolio is less risky than both the retail and manufacturing sector portfolios. Both the retail and gold stocks display a higher propensity to yield positively skewed returns in the crisis periods, contrary to the manufacturing stocks. The r-vine is found to best capture the multivariate dependence structure of the stocks in the retail and gold-mining portfolios, while the d-vine does it for the manufacturing stock portfolio. These findings could be used to develop dependence risk- and investment risk-adjusted strategies for investment, rebalancing and hedging which more adequately account for the downside risk in various market conditions.     

Transmission channels of international financial crises to African stock markets: the case of the euro sovereign debt crisis

This article investigates the effects of the European sovereign debt crisis on African stock markets within a Bayesian shrinkage VAR framework. This method allows us to consider both North African and Sub-Saharan African stock markets, and provides a flexible parsimonious specification. The results reveal varying reactions of the impulse response functions. The most exposed African stock markets are those of Egypt, South Africa and Mauritius, while the least affected stock market is, surprisingly, that of Ivory Coast. Our analysis shows that, in addition to direct transmission, several macroeconomic and market channels, such as commodities, exports, and exchange rates, are relevant. Specifically, countries with strong commercial links to European countries will be most impacted by the crisis. The severity of transmission also depends on the country’s dependence on commodities.     

Evaluating sovereign risk spillovers on domestic banks during the European debt crisis

Using a Markov-switching model with time-varying probabilities, spillovers from sovereign to domestic bank CDS spreads during the European debt crisis for a set of 14 European countries and 30 European banks are investigated. Our model is able to capture how the increased sovereign risk observed between 2010 and 2013 throughout Europe has impacted i) the probability that banks fall into a crisis regime and ii) the probability that banks stay in the crisis regime. The latter state is characterized by a high volatility and large positive returns of CDS spreads. Different regime-dependent indicators have been computed to assess heterogeneity within the region. The evidence indicates that the intensification of sovereign risk observed during the European debt crisis has positively and significantly driven the regime shifts in volatility of the bank CDS spreads due to increased risk aversion. The results show that the increase in sovereign credit risk seems to have generated second-round effects for some banks that have experienced a deterioration in their funding conditions due to a rise in the domestic sovereign default risk. Overall, our results suggest that sovereign CDS spreads can be considered good forewarning indicators for predicting the evolution of bank CDS spreads. We also find that the effects differ depending on the country and the financial institution. This result suggests that banks are heterogeneously exposed to sovereign credit risk within the same country. One argument relates to the size of these financial institutions and the domestic exposure to sovereign debt.     

Modelling the dependency between currency and debt crises: An option based approach

The interrelation between currency and debt crises is considered in a model relying on option pricing theory. By capturing uncertainty and time aspects in this stochastic and dynamic framework we analyze parameters that determine the probabilities and dependencies of these crises.     

Household debt and spending during the financial crisis: Evidence from Danish micro data

We use data for nearly 500,000 Danish households to study the relationship between household leverage prior to the financial crisis of 2007–2009 and the development in spending over the course of the crisis. We find a strong negative correlation between pre-crisis leverage and the change in spending during the crisis. This reflects that highly levered households spent a larger share of their income than their less-levered peers prior to the crisis, resulting in larger increases in debt in these years. Once we condition on the size of the pre-crisis change in debt, a high level of debt is no longer associated with a larger spending decline. Our results suggest that the larger decline in spending among high-leverage households is the result of a spending normalization pattern that is also found in other years, rather than a causal effect of high debt levels suppressing household spending during the crisis.     

Dependence structure between nominal and index-linked bond returns: a bivariate copula and DCC-GARCH approach

This article investigates the dependence structure related to four French nominal and index-linked bonds with various maturities and reference indices. To achieve this aim, we estimate various copulas to select the appropriate one for our data. We also compare results obtained using the copula method with multivariate dynamic conditional correlation GARCH (DCC-GARCH) modelling. The major issue in this study is that the best copulas used to model the dependence among bond returns are the Plackett and Student models. We also find a dynamic correlation between bond returns. In particular, the relationship between nominal and indexed bonds is characterized by an asymmetric dependence. Moreover, the results obtained by the copula approach are confirmed by those obtained by multivariate GARCH modelling. Our empirical study provides a useful method that may be employed by decision-makers to quantitatively introduce dependence and spillover effects in their bond issuance policy. For investors, we propose optimal investment combinations in bonds with respect to their investment horizons.     

我国地方政府自行发债的理论及管理方式探讨

地方政府自行发债具备其理论基础,随着社会经济的发展,我国也逐步具备了自行发债的条件。中央决定开展地方政府自行发债试点,对于化解地方政府债务危机和完善我国的财税体制都具有重要意义。然而,这其中也存在一些潜在问题,比如监督机制不完善、隐性债务规模巨大等。合理确定地方债的发债规模,科学编制地方债的使用计划以及完善地方债的信息披露与监督机制,将有利于构建我国良好的地方债管理体制。     

The financial fragility and the crisis of the Greek government sector

The purpose of this paper is to develop Minskyan financial fragility indices for the government sector and to examine the financial structure of the Greek government before and after the onset of the sovereign debt crisis in 2009. We provide empirical evidence that clearly shows the growing financial fragility of the Greek public sector in the 2000s. We also assess the effectiveness of the implemented bailout adjustment programmes in Greece and claim that the conducted austerity measures and fiscal consolidation have not significantly improved the financial posture of the Greek government sector. We argue that the implementation of fiscal and wage austerity in an economy that lacks structural competitiveness produces prolonged recession and unemployment with adverse feedback effects on the financial fragility of the government.     

Italian households’ debt: the participation to the debt market and the size of the loan

This paper analyses Italian households’ participation to the debt market, separating the probability of demanding a loan from the probability of being rationed by lenders; on the supply side of the market specific attention is paid to enforcement costs of the loan contract when customers default. A new result is that the age of the household head acts essentially as a demand factor, rather than a variable influencing the lender’s choice. Both current and future households’ income increase the demand for loans and reduce credit rationing. Self-employed workers are more rationed by lenders. Credit constraints are also linked to the area where the household lives, partly because of different enforcement costs. The final part of the paper analyses the equilibrium quantity of the loan, for households who have a loan and are not constrained. The loan size is positively linked to household net wealth and income profile. An important contribution of this paper is the finding that, not only the participation to the debt market, but also the loan size is negatively affected by enforcement costs.      

The risk of the sovereign debt default: the Eurozone crisis 2008–2013

We investigate the relationship of the market pricing of sovereign risk to default, through credit default swap (CDS) spreads for 16 Eurozone countries during 2008q1–2013q3. We take into account, through appropriate non-linear generalized method of moments (GMM) estimations the endogeneity problem. We focus on ‘fiscal space’ (DEBT or FISCAL), and the downgrade announcements (DOWN). We find DEBT (FISCAL) to have significant (insignificant) effects on the CDS concave function, as well as, DOWN in a linear one. It has also been confirmed significant pricing discrimination between South and West Euro Area Periphery (SWEAP) and the core Eurozone, highlighting asymmetries discovered either by the respective size of estimated DEBT coefficients or by the significant effects of DOWN that have only on CDS of SWEAP countries. The current account balance or the inflation rate, as well as, relevant interaction terms seem not to affect the spreads of the EMU. These findings, together with the estimated structural change on CDS pattern in early 2011, coinciding with significant either the DOWN in the pre-crisis period (2008–2010) or the DEBT in the post-crisis one (2011–2013) on the CDS, seem to be consistent with self-fulfilling crises literature and the inherent vulnerability of EMU, on other words, the ‘fragility hypothesis of the Eurozone’.     

Fiscal adjustment and the costs of public debt service: evidence from OECD countries

We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates – a key fiscal indicator reflecting the costs of government debt service. As Europe’s sovereign debt crisis has shown, governments confronted with high deficits and rising debt may be forced to enact fiscal adjustments in order to avoid increasing market pressure and solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. We find that large and expenditure-based adjustments lead to substantially lower long-term interest rates. Small and revenue-based measures do not have an effect on interest rates. Financial markets thus only seem to value strict and decisive measures – a clear sign that the government’s pledge to cut the deficit is credible.     

Exploring the link between household debt and income inequality: an asymmetric approach

We investigate the relationship between household debt and income inequality in the USA, allowing for asymmetry, using data over the period 1913–2008. We find evidence of an asymmetric cointegration between household debt and inequality for different regimes. Our results indicate household debt only responds to positive changes in income inequality, while there is no evidence of falling inequality significantly affecting household debt. The presence of this asymmetry provides further empirical insights into the emerging literature on household debt and inequality.     

Government risk premiums in the bond market: EMU and Canada

This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada, using data for bond yield spreads for the period 1991–2005. We find that risk premiums by central governments respond positively to debt and deficits; German states enjoyed a favourable position in financial markets before EMU but not thereafter; Spanish and Canadian provinces risk premiums over the whole period; German and Spanish sub-central governments pay liquidity-related interest rate premiums; Canadian and German provinces/states that benefit from fiscal equalization lower spreads. This is evidence of market discipline at work and of credibility of the EU no-bailout clause.     

A dynamic approach to analysing the effect of the global crisis on nonperforming loans: evidence from the Turkish banking sector

This article analyses the effect of the global crisis on the determinants of nonperforming loans (NPLs) in the Turkish banking sector by using dynamic panel estimation techniques. Empirical findings suggest that NPLs present persistence, which is more evident after the crisis, while other regressors have also persistent effects in the post-crisis period. Moreover, NPLs are mostly shaped by bank-specific variables before the crisis, whereas, after the crisis, NPLs are also driven by macroeconomic and policy-related variables. In particular, the post-crisis significance of GDP, policy rate and sovereign debt shows that robust economic activity, tight monetary policy and strong fiscal balances restrict NPLs, thereby enhancing financial stability. The significance of inflation in both sub-periods shows that commitment to price stability objective is indispensable for limiting NPLs and promoting financial stability. In the period ahead, the speed and the direction of normalization in global monetary policies may determine the course of financial conditions, which, therefore, have implications regarding NPL dynamics and financial stability.     

Equity market neutral hedge funds and the stock market: an application of score-driven copula models

In this article, we study the time-varying market neutrality of equity market neutral hedge funds. We use data from the Hedge Fund Research? Equity Market Neutral Index (HFRX EH), which represents the performance of a portfolio of individual equity market neutral hedge funds. For each day, we measure different levels of association of the Standard and Poor’s 500 (S&;P 500) index and the HFRX EH. We use non-linear dynamic conditional score models of location, scale and copula that, to the best of our knowledge, have not yet been applied in the body of literature on hedge funds. We study whether the neutrality of the HFRX EH that is evidenced in the body of literature for the period of April 1993–April 2003 also holds for the following decade, for the period of May 2003–December 2016. We estimate different average levels of association for the pre-, during- and post-periods of the US financial crisis of 2008. We find that the association of the S&;P 500 and the HFRX EH, on average, is significantly positive for the pre- and post-periods of the financial crisis, and it is significantly negative for the period during the financial crisis.     

The impact of political institutions on U.S. state bond yields during crises: evidence from the 2008 credit market seizure

This study examines how political institutions mediate bond market reactions to severe economic crisis, based on U.S. states’ experience of the 2008 credit market seizure. Following severe fiscal shocks, political institutions assume greater importance in assessing risk characteristics of state bonds. The bond market reacts most strongly to two factors: public sector union strength in a state and the proportion of Democrats in the state legislature. We suggest that the identity of political institutions becomes increasingly important, during periods of economic crises, when credit markets might expect that political systems can no longer delay stabilisations and must deliver policy.     

China's liberalizing stock market,crude oil,and safe-haven assets: A linkage study based on a novel multivariate wavelet-vine copula approach

China is the world's largest oil importer, and therefore the correlations between stock indices and highly volatile oil prices deserve close examination when investing in China's gradually liberalizing stock market. Another concern for international investors is whether safe-haven assets can reduce portfolio risks for investment in China. The paper makes two main contributions. First, we develop a novel method of examining a multivariate dependence structure by combining wavelet analysis with the vine copula model. Second, we apply the proposed methodology to study the correlations between China's liberalizing stock market, petroleum, and safe-haven assets at different frequencies. We find that the multidimensional dependence of these assets has been altered as a result of the 2008 global financial crisis. Moreover, the vine structures exhibit dependence patterns that vary over time horizons, indicating that the multidimensional dependence is sensitive to time scales.     

The dependence structure between the Canadian stock market and the USD/CAD exchange rate: a copula approach

Abstract This paper investigates the dependence structure between the real Canadian stock returns and the real USD/CAD exchange rate returns, using the Symmetrized Joe‐Clayton (SJC) copula function. We estimate the SJC copula with monthly data over the period 1995:1 to 2006:12. Our results show significant asymmetric static and dynamic tail dependence between the real stock returns and the real exchange rate returns, such that the two returns are more dependent in the left than in the right tail of their joint distribution. We explain this asymmetric dependence in terms of an asymmetric interest rate policy by Canadian monetary authorities in response to changes in the real exchange rate during sub‐periods of falling and rising commodity prices.