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

Hans Dewachter, Leonardo Iania, Marco Lyrio () and Maite de Sola Perea

Journal of Banking & Finance, 2015, vol. 50, issue C, 308-325

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 et al. (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin et al. (forthcoming). 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)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

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Related works:
Working Paper: 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 (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:50:y:2015:i:c:p:308-325

DOI: 10.1016/j.jbankfin.2014.03.011

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