Absence of speculation in the European sovereign debt markets

Bart Frijns and Remco Zwinkels ()

Journal of Economic Behavior & Organization, 2020, vol. 169, issue C, 245-265

Abstract: European sovereign debt markets have been under scrutiny since the sovereign debt crisis of 2009. In this paper, we study to what extent the extreme dynamics were driven by fundamentals or speculation. We do so by decomposing bond and CDS spreads into fundamental and non-fundamental parts using a heterogeneous agent model. We find that bond markets are driven for 80% by liquidity trading, 13% by credit news, and only 5.4% by speculation. The CDS market is for 49% driven by credit news, 45% liquidity trading, and 5.5% speculation. The relative importance of the different types of agents varies over time, though.

Keywords: Credit risk; sovereign bonds; Credit default swap; heterogeneous agent models (search for similar items in EconPapers)
JEL-codes: C32 C5 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:169:y:2020:i:c:p:245-265

DOI: 10.1016/j.jebo.2019.11.017

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