Macroeconomic variables and the sovereign risk premia in EMU, non-EMU EU, and developed countries

Arkady Gevorkyan () and Willi Semmler

Empirica, 2016, vol. 43, issue 1, 35 pages

Abstract: This project studies and models key macroeconomic variables and their impact on sovereign risk premia across select European economies and developed countries. The sample is divided into three groups of countries: those in the European Monetary Union (EMU); the standalone economies outside the EMU but members of the broader European Union (EU); and other developed economies. The main subject of examination across all three groups is the impact of macroeconomic variables on sovereign borrowing costs. EU countries have experienced high financial stress and a rapid rise in the credit default swaps (CDS) spreads during the EMU debt crisis. A nonlinear vector smooth transition autoregressive model is applied to investigate such a regime change in the finance-output link using sovereign CDS and industrial production index. The paper finds that regime-switching takes place rather suddenly in most EMU countries. The study concludes that due to the potential spillover effects in the EU as a whole, the individual country macroeconomic indicators were less reflected in the financial stress and spillover and contagion effects became dominant. Copyright Springer Science+Business Media New York 2016

Keywords: Debt crisis; Vector STAR; GARCH; Regime-switching; Euro area; Financial stress; E44; F34; G15 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s10663-015-9286-2

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