A Macro-Financial Analysis of the Euro Area Sovereign Bond Market

National Bank of Belgium Working Paper No. 259

42 Pages Posted: 20 Jun 2014

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Leonardo Iania

Université catholique de Louvain

Marco Lyrio

Insper Institute of Education and Research

Maite de Sola

National Bank of Belgium - Research Department

Date Written: June 2014

Abstract

We estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin, Priebsch, and Singleton (2013). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005-2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011.

Keywords: euro area sovereign bonds, yield spread decomposition, unspanned macro factors, fair spreads

JEL Classification: E43, E44, E47

Suggested Citation

Dewachter, Hans and Iania, Leonardo and Lyrio, Marco and de Sola, Maite, A Macro-Financial Analysis of the Euro Area Sovereign Bond Market (June 2014). National Bank of Belgium Working Paper No. 259, Available at SSRN: https://ssrn.com/abstract=2456621 or http://dx.doi.org/10.2139/ssrn.2456621

Hans Dewachter (Contact Author)

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
Belgium
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Leonardo Iania

Université catholique de Louvain ( email )

34, Voie du roman pays
louvain la neuve, 1348
Belgium

HOME PAGE: http://https://sites.google.com/site/ianialeonardo/

Marco Lyrio

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.insper.edu.br/en/faculty-and-research/marco-lyrio

Maite De Sola

National Bank of Belgium - Research Department ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

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