On the Time-Varying Relationship between EMU Sovereign Spreads and Their Determinants

ISEG Economics Working Paper No. 05/2013/DE/UECE

25 Pages Posted: 25 Feb 2013

See all articles by Antonio Afonso

Antonio Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics)

Michael Arghyrou

University of Piraeus

George Bagdatoglou

Timberlake Consultants

Alexandros Kontonikas

University of Glasgow - Department of Economics

Date Written: February 22, 2013

Abstract

We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999-August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly time-varying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads’ determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves.

Keywords: euro area, crisis, spreads, time-series analysis, time-varying relationship

JEL Classification: C22, C52, E43, E62, G12

Suggested Citation

Afonso, Antonio and Arghyrou, Michael and Bagdatoglou, George and Kontonikas, Alexandros, On the Time-Varying Relationship between EMU Sovereign Spreads and Their Determinants (February 22, 2013). ISEG Economics Working Paper No. 05/2013/DE/UECE . Available at SSRN: https://ssrn.com/abstract=2222754 or http://dx.doi.org/10.2139/ssrn.2222754

Antonio Afonso (Contact Author)

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
Lisbon, 1248-078
Portugal
+351 21 392 5985 (Phone)
+351 21 396 6407 (Fax)

HOME PAGE: http://https://www.iseg.ulisboa.pt/aquila/homepage/aafonso

UECE (Research Unit on Complexity and Economics)

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://https://uece.rc.iseg.ulisboa.pt/

Michael Arghyrou

University of Piraeus ( email )

Karaoli & Dimitriou 80
Piraeus, 18534
Greece
19 (Fax)

HOME PAGE: http://ideas.repec.org/e/par104.html

George Bagdatoglou

Timberlake Consultants ( email )

B3 Broomsleigh Business Park
Worsley Bridge Road
London, SE26 5BN
United Kingdom

Alexandros Kontonikas

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

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