Is the European Sovereign Crisis Self-Fulfilling?- Empirical Evidence About the Drivers of Market Sentiments

28 Pages Posted: 24 Jul 2012

See all articles by Anne Laure Delatte

Anne Laure Delatte

Groupe ESC Rouen; Observatoire Français des Conjonctures Economiques

Julien Fouquau

University of Orleans

Catherine Bruneau

Université Paris X Nanterre; Université Paris I Panthéon-Sorbonne

Date Written: July 24, 2012

Abstract

We assess the nature of the European sovereign crisis in the light of a model borrowed from the second generation of currency crises. We bring the theory to the data to empirically test the presence of self-fulfilling dynamics and to identify what may have driven the market sentiment during this crisis. To do so we estimate the probability of default of five European 'peripheral' countries during January 2006 to September 2011 with a panel smooth threshold regression. Our estimation results suggest that 1/ both the fundamentals and 'animal spirit' ignited the European sovereign crisis; 2/ the sovereign Credit Default Swap market (CDS), the rating agencies and the CDS of the banking sector have played dominant roles in driving market sentiments.

Keywords: European sovereign crisis, self-fulfilling crisis, Panel Smooth Threshold Regression Models

JEL Classification: E4, F3, F4, E6, H6, C23

Suggested Citation

Delatte, Anne Laure and Fouquau, Julien and Bruneau, Catherine, Is the European Sovereign Crisis Self-Fulfilling?- Empirical Evidence About the Drivers of Market Sentiments (July 24, 2012). Available at SSRN: https://ssrn.com/abstract=2116240 or http://dx.doi.org/10.2139/ssrn.2116240

Anne Laure Delatte (Contact Author)

Groupe ESC Rouen ( email )

1, rue du Maréchal Juin - BP 188
Mont Saint Aignan Cedex, Normandy 76825
France

Observatoire Français des Conjonctures Economiques ( email )

69 Quai d'Orsay
Paris 75004
France

Julien Fouquau

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

Catherine Bruneau

Université Paris X Nanterre ( email )

Room G301, Building G
92001 Nanterre Cedex, 92001
France

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

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