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"Whatever it takes" to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects

Antonio Afonso, Michael Arghyrou (), María Gadea () and Alexandros Kontonikas ()

No 2017/02, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach.First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016.Second, we estimate the impact of ECB policy interventions on the time-varying risk fact or sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programmein August 2012.This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk.Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.

Keywords: euro area; spreads; crisis; time-varying relationship; unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E44 F30 G01 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2017-09
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https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_002_2017.pdf (application/pdf)

Related works:
Journal Article: “Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects (2018) Downloads
Working Paper: "Whatever it takes" to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects (2017) Downloads
Working Paper: "Whatever it takes" to Resolve the European Sovereign Debt Crisis? Bond Pricing Regime Switches and Monetary Policy Effects (2017) Downloads
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