Sovereign risk and asset market dynamics in the euro area

Erica Perego

Journal of International Money and Finance, 2020, vol. 109, issue C

Abstract: This paper studies the behavior of euro area asset market co-movements during the period 2010–2014, through the lens of a DSGE model. The economy is a two-country world consisting of a core and a periphery and featuring an international banking sector, international equity markets, home bias in sovereign bond holdings, and sovereign default. The periphery is buffeted by a sovereign risk shock, whose process is estimated from the data. The model accounts successfully for the divergence in core-periphery correlations between stock and sovereign bond returns. The simulation results indicate that the sovereign risk shock explains 50% of the increase in the sovereign spread and of the decrease in global investments, and 7% of the decrease in global output during the sovereign debt crisis.

Keywords: Currency union; International financial markets; Sovereign risk; General equilibrium (search for similar items in EconPapers)
JEL-codes: F41 F44 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Sovereign Risk and Asset Market Dynamics in the Euro Area (2018)
Working Paper: Sovereign risk and asset market dynamics in the euro area (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:109:y:2020:i:c:s026156062030190x

DOI: 10.1016/j.jimonfin.2020.102234

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