On the time-varying relationship between EMU sovereign spreads and their determinants |
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| Affiliation: | 1. ISEG/ULisbon, University of Lisbon, Department of Economics, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal;2. UECE, Research Unit on Complexity and Economics, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal;3. European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany;4. Cardiff Business School, Economics Section, Cardiff University, Colum Drive, Cardiff, CF10 3EU, UK;5. Deloitte, Athene Place, 66 Shoe Lane, London, EC4A 3BQ, UK;6. Adam Smith Business School, Accounting and Finance Subject, University of Glasgow, Glasgow, G12 8QQ, UK;1. ISEG/UTL—Technical University of Lisbon, Department of Economics, Portugal;3. European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany;4. ISEG/UTL—Technical University of Lisbon, Portugal |
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| Abstract: | We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999–August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly time-varying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads' determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves. |
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