Quantifying risks to sovereign market access: Methods and challenges

Diana Zigraiova, Aitor Erce and Xu Jiang
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Xu Jiang: ESM

Working Papers from European Stability Mechanism

Abstract: In this paper we use data from the euro area to study episodes when sovereigns lose market access. We construct a detailed dataset with potential indicators of market access tensions, and evaluate their ability to forecast episodes when market access is lost, using various econometric approaches. We find that factors associated with high market access tensions are not limited to financial markets, but also encompass developments in global demand, macroeconomic conditions and the fiscal stance. Using the top-performing indicators, we construct a number of market tension indices and use them as single predictors of market access tensions. While such indices are helpful in capturing worsening conditions, they do not yield satisfactory out-of-sample results. On the other hand, using the same top- performing indicators in various multivariate models generates good forecasts of upcoming difficulties in accessing sovereign bond markets. Our results thus point to a trade-off between communicability and accuracy that policymakers face in the search for tools to evaluate risks to market access.

Keywords: Euro area sovereign bond market; forecasting; sovereign debt crises, sovereign market access; variable selection (search for similar items in EconPapers)
JEL-codes: C53 G01 G15 (search for similar items in EconPapers)
Pages: 84
Date: 2020-01-06
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Working Paper: Quantifying Risks to Sovereign Market Access: Methods and Challenges (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:42

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