Regime-Dependent Sovereign Risk Pricing During the Euro Crisis

Richard Portes, Julien Fouquau and Anne-Laure Delatte

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Abstract: Previous work has documented a greater sensitivity of long-term government bond yields to fundamentals in euro area peripheral countries during the euro crisis, but we know little about the driver(s) of regime switches. Our estimates based on a panel smooth threshold regression model quantify and explain them: (1) investors have penalized a deterioration of fundamentals more strongly from 2010 to 2012; (2) the higher the bank credit risk, measured with the premium on credit derivatives, the higher the extra premium on fundamentals; (3) after ECB President Draghi's speech in July 2012, it took 1 year to restore the noncrisis regime and suppress the extra premium.

Keywords: European sovereign crisis; Panel Smooth Transition Regression Models; CDS indices (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (45)

Published in Review of Finance, 2017, 21 (1Suppl), pp.363-385. ⟨10.1093/rof/rfw050⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01663123

DOI: 10.1093/rof/rfw050

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