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Sovereign risk and asset market dynamics in the euro area

Erica Perego ()

No 18-01, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: This paper studies the behaviour of euro area asset market comovements during the period 2010- 2014, through the lens of a DSGE model. The economy is a two-country world consisting of a core and a periphery and featuring an international banking sector, home bias in bond holdings, and default. The periphery is buffeted by a sovereign risk shock, whose process is estimated from the data. The model successfully accounts for the divergence in core-periphery correlations between stock and bond returns. Simulation results indicate that the sovereign risk shock explains 50% of the increase in sovereign and loan-deposit spreads and 7% of the decrease in global output during the sovereign debt crisis.

Keywords: Currency union; international financial markets; sovereign risk; general equilibrium (search for similar items in EconPapers)
JEL-codes: F41 F44 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
Date: 2018
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Working Paper: Sovereign Risk and Asset Market Dynamics in the Euro Area (2018) Downloads
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