Sovereign risk and asset market dynamics in the euro area

Erica Perego

No 18-01, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: This paper studies the behaviour of euro area asset market comovements 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, home bias in bond holdings, and default. The periphery is buffeted by a sovereign risk shock, whose process is estimated from the data. The model successfully accounts for the divergence in core-periphery correlations between stock and bond returns. Simulation results indicate that the sovereign risk shock explains 50% of the increase in sovereign and loan-deposit spreads 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)
Pages: 34 pages
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Sovereign risk and asset market dynamics in the euro area (2020)
Working Paper: Sovereign Risk and Asset Market Dynamics in the Euro Area (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eve:wpaper:18-01

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