Sovereign spreads and financial market behavior before and during the crisis

Pawel Gajewski

No 4/2014, Lodz Economics Working Papers from University of Lodz, Faculty of Economics and Sociology

Abstract: This paper aims at shedding some light on the mechanisms of pricing the EMU countries’ sovereign bonds in financial markets. Employing the Augmented Mean Group (AMG) estimator, we find that major changes have occurred in terms of variables underlying sovereign risk. Since 2009, macroeconomic and fiscal fundamentals has started to play a more important role, but only those that capture domestic demand evolution. In contrast, price competitiveness seems less important. The second conclusion lies in reversed attitude towards banking sector imbalances, as compared to the earlier period. One of the problems addressed concerns the horizon of projected macroeconomic and fiscal variables taken into account. The paper presents some evidence that financial markets have become more myopic and started to rely on short-term forecasts, whilst they had tended to encompass longer-term forecast horizon before the crisis.

Keywords: financial crisis; fiscal policy; EMU; panel estimation (search for similar items in EconPapers)
JEL-codes: C23 E43 E62 F34 G01 G12 H60 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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