Regime-switches in the Rollover of Sovereign Risk

Elton Beqiraj, Valeria Patella and Massimiliano Tancioni ()

No 191, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: This paper presents a unified analysis of the run-up of sovereign and credit risk in an environment where latent factors, along with fundamentals, feed financial crises. A Markov-switching VAR in four variables (debt, GDP, sovereign and corporate spreads) is estimated on Italian 1990-2018 data. The model displays both stochastic and systematic switches in the determination of spreads, and historically identifies: i ) a high sovereign stress state of high and volatile spreads, which lines up mostly with crisis times; ii ) a high credit stress state of tight connections between spreads, prevailing on the pre-euro and global crisis periods. We find that high spreads in high stress states are mainly explained by latent factors, orthogonal to fundamentals and possibly linked to agents' expectations. In normal times, instead, fiscal shocks are expansionary and trigger drops in spreads.

Keywords: Fundamentals; Latent factors; Sovereign spreads; Credit spreads; Financial crisis (search for similar items in EconPapers)
JEL-codes: E4 E6 G01 H63 (search for similar items in EconPapers)
Pages: 45
Date: 2019-11
New Economics Papers: this item is included in nep-eec, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.dipecodir.it/wpsap/data/wp191.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sap:wpaper:wp191

Access Statistics for this paper

More papers in Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma
Bibliographic data for series maintained by Luisa Giuriato ().