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A macro-financial analysis of the euro area sovereign bond market
Institution:1. National Bank of Belgium, de Berlaimontlaan 3, 1000 Brussels, Belgium;2. Center for Economic Studies, University of Leuven, Naamsestraat 69, Leuven, Belgium;3. CESifo, Poschingerstr. 5, 81679 Munich, Germany;4. Louvain School of Management, Place de Doyens 1, bte L2.01.02 à 1348 Louvain-la-Neuve, Belgium;5. Insper Institute of Education and Research, Rua Quatá 300, São Paulo, Brazil;1. Department of Economics, University of Bologna, Italy;2. Institute for Quantitative Business and Economics Research, University of Kiel, and Kiel Institute for the World Economy, Germany;1. College of Business, Zayed University, Abu Dhabi, United Arab Emirates;2. Department of Business Studies, Namal University, Mianwali, Pakistan;3. Department of Business Administration, Ono Academic College, Zahal 104 Street, Kiryat Ono, Israel;1. International Monetary Fund, 700 19th St. NW, Washington, DC 20431, USA;2. European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany;3. Centre for Financial Studies, Frankfurt am Main, Germany;1. Vrije Universiteit Brussel, Faculteit Economische en Sociale Wetenschappen, Pleinlaan, 2 B-1050 Brussel, Belgium;2. Czech National Bank, Economic Research Department, Na P?íkopě 28, 11503 Prague 1, Czech Republic;1. University of Padova Via Cesare Battisti 241, 35121 Padova, Italy;2. University Ca’ Foscari Venezia, SAFE-Goethe University Frankfurt, Universita’ Ca'' Foscari Venezia, and MIT Sloan, Grueneburgplatz 1, 60323 Frankfurt am Main, Germany;3. Free University of Bozen-Bolzano and BI Norwegian Business School, Piazza Universita’ 1, 39100 Bozen-Bolzano, Italy;4. MIT Sloan and NBER, 100 Main Street, Cambridge, MA 02139, USA
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 et al. (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin et al. (forthcoming). 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.
Keywords:Euro area sovereign bonds  Yield spread decomposition  Unspanned macro-factors  Fair spreads
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