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Bond risk premia, macroeconomic factors and financial crisis in the euro area

Garcí­a, Juan Angel and Sebastian E. V. Werner

No 1938, Working Paper Series from European Central Bank

Abstract: This paper investigates the power of macroeconomic factors to explain euro area bond risk premia using (i) a large dataset that captures the nowadays data-rich environment (ii) the Elastic Net variable selection. We find that macroeconomic factors, in particular economic activity and sentiment indicators, explain 40% of the variability of risk premia before the crisis, and up to 55% during the financial crisis, and both for core countries (from 40% to 60%) and periphery countries (from 35% to 44%). Moreover, macroeconomic factor models clearly outperform financial indicators like the CP-factor and credit default swap (CDS) premia, even in periods of significant market turbulence. JEL Classification: E43, E44, G01, G12, C52, C55

Keywords: bond risk premium; financial crisis; macro factors; model selection; variable selection (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-eec, nep-fmk, nep-ifn, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20161938

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