Estimating the contribution of macroeconomic factors to sovereign bond spreads in the euro area

Pablo Burriel, Mar Delgado-Téllez, Camila Figueroa, Iván Kataryniuk and Javier Pérez
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Pablo Burriel: Banco de España
Mar Delgado-Téllez: EUROPEAN CENTRAL BANK
Camila Figueroa: AFI

No 2408, Working Papers from Banco de España

Abstract: This paper proposes a novel approach to estimating the contribution of macroeconomic factors to sovereign spreads in the euro area, defined as the spread level consistent with the country’s prevailing macroeconomic conditions. Despite the wealth of papers estimating sovereign spreads, model-dependency and lack of robustness remain key considerations. Accordingly, we propose a “thick modeling” empirical framework, based on the estimation of a wide range of models. We focus on 10-year sovereign bond yields for nine euro area countries, using a sample that covers the period January 2000 to December 2023. Our results show that observed spreads behave in line with macro-financial determinants in “normal” times. Macroeconomic determinants are also able to account for a significant fraction of the observed sovereign spread dynamics in most episodes of financial turbulence, such as the pandemic and the aftermath of the Russian invasion of Ukraine. However, we find evidence of some deviations of sovereign spreads from their estimated values during the 2010-2012 euro area sovereign debt crisis. In this period, macroeconomic indicators are able to explain at most 26% of the observed peaks in spreads among non-core countries.

Keywords: sovereign bond spreads; euro area; macroeconomic fundamentals (search for similar items in EconPapers)
JEL-codes: E44 G15 O52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2024-03
New Economics Papers: this item is included in nep-ban, nep-cis, nep-eec, nep-fdg, nep-ifn and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2408

DOI: 10.53479/36257

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