Are European sovereign bonds fairly priced? The role of modelling uncertainty

Leo de Haan, Jeroen Hessel () and Jan Willem End

Journal of International Money and Finance, 2014, vol. 47, issue C, 239-267

Abstract: This paper examines the extent to which large swings of sovereign yields in euro area countries during the debt crisis can be attributed to fundamentals, focusing on the inherent uncertainty in bond yield models. We show that the outcomes are strongly affected by modelling choices with regard to i) the confidence bands for the model prediction, ii) the assumption whether the model coefficients are similar across countries or not, iii) the sample selection, iv) the inclusion of financial variables and v) the choice of time-varying coefficients. These choices affect the explanatory power of macro fundamentals and the extent of mispricing.

Keywords: Sovereign bond; Interest rate; Risk premium (search for similar items in EconPapers)
JEL-codes: E43 E44 F34 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:47:y:2014:i:c:p:239-267

DOI: 10.1016/j.jimonfin.2014.06.001

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