Economics at your fingertips  

Anticipated Macroeconomic Fundamentals, Sovereign Spreads and Regime-Switching: The Case of the Euro Area

Gilles Dufrénot (), Olivier Damette and Philippe Froute

Post-Print from HAL

Abstract: This paper provides evidence that forecasts in macroeconomic fundamentals can drive the changes observed in the sovereign bond spreads in a nonlinear fashion. More specifically, the impact of the anticipated macroeconomic variables on sovereign spreads depends upon the global conditions prevailing in the financial markets (appetite for risk, market liquidity, health of the banking sector). We use a nonlinear model of sovereign spreads, namely a time-varying probability Markov-switching model. The paper adds to the empirical literature by documenting that the strength with which changes in market expectations of economic fundamentals are factored in the determination of the Euro area bond market spreads is regime-dependent. Such dependence implies multiple "equilibrium relationships" between spreads and macroeconomic variables, and switches between the equilibria. We contribute to the literature by first proposing a simple analytical model in which some sources of regime switches are described. In particular, spreads are affected by the investors' perceived probability of default on debt servicing by governments and this probability varies across time because investors anticipate the future outcome of macroeconomic fundamentals influencing sovereign debts. We then consider a reduced-form of the analytical model to illustrate the empirical performance of time-varying Markov-switching model in describing the experience of the euro area spread between 2003 and 2009.

Keywords: Financial Economics; Macroeconomics; Quantitative finance; Banking; Économie quantitative (search for similar items in EconPapers)
Date: 2014
Note: View the original document on HAL open archive server:
References: Add references at CitEc
Citations: Track citations by RSS feed

Published in Gilles Dufrénot; Fredj Jawadi; Waël Louhichi. Market Microstructure and Nonlinear Dynamics, Springer International Publishing, pp.205-234, 2014, 978-3-319-05211-3

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().

Page updated 2023-01-20
Handle: RePEc:hal:journl:hal-01463764