Speculation in European Sovereign Debt Markets

41 Pages Posted: 2 Feb 2016 Last revised: 11 Mar 2016

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: March 11, 2016

Abstract

European sovereign debt markets have been under scrutiny ever since the sovereign debt crisis of 2009. In this paper, we decompose bond and CDS spreads into fundamental and non-fundamental parts by means of a heterogeneous agent model. The model contains arbitrageurs who make use of the arbitrage opportunities between bond and CDS markets, speculators who trade on price trends, as well as liquidity traders. We find that bond markets are driven for 80% by liquidity trading, 13% by credit news, and only 5.4% by speculation. The CDS market is for 49% driven by credit news, 45% liquidity trading, and 5.5% speculation. The relative importance of the different types of agents varies over time, though.

Keywords: Credit risk, sovereign bonds, CDS, heterogeneous agent models

JEL Classification: C32, C5, G15

Suggested Citation

Frijns, Bart and Zwinkels, Remco C.J., Speculation in European Sovereign Debt Markets (March 11, 2016). Available at SSRN: https://ssrn.com/abstract=2725975 or http://dx.doi.org/10.2139/ssrn.2725975

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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