A macro-financial analysis of the euro area sovereign bond market

Hans Dewachter, Leonardo Iania, Marco Lyrio () and Maite de Sola Perea ()
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Maite de Sola Perea: National Bank of Belgium, Research Department

No 259, Working Paper Research from National Bank of Belgium

Abstract: We estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin, Priebsch, and Singleton (2013). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005-2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011.

Keywords: Euro area sovereign bonds; yield spread decomposition; unspanned macro factors; fair spreads (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014-06
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: A macro-financial analysis of the euro area sovereign bond market (2015)
Working Paper: A macro-financial analysis of the euro area sovereign bond market (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201406-259

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