How Do Experts Forecast Sovereign Spreads?

47 Pages Posted: 9 Dec 2016

See all articles by Jacopo Cimadomo

Jacopo Cimadomo

European Central Bank; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Peter Claeys

Vrije Universiteit Brussel (VUB) - Faculty of Economic, Social and Political Sciences; European University Institute - Economics Department (ECO)

Marcos Poplawski-Ribeiro

International Monetary Fund (IMF)

Date Written: May 2016

Abstract

This paper assesses how forecasting experts form their expectations about futuregovernment bond spreads. Using monthly survey forecasts for France, Italy and theUnited Kingdom between January 1993 and October 2014, we test whether respondentsconsider the expected evolution of the fiscal balance-and other economicfundamentals-to be significant drivers of the expected bond yield differential over abenchmark German 10-year bond. Our main result is that a projected improvement of thefiscal outlook significantly reduces expected sovereign spreads. This suggests thatcredible fiscal plans affect market experts' expectations and reduce the pressure onsovereign bond markets. In addition, we show that expected fundamentals generally play amore important role in explaining forecasted spreads compared to realized spreads.

Keywords: Bond markets, France, Italy, United Kingdom, Germany, Bonds, Bond yields, Cross country analysis, Econometric models, Regression analysis, Forecasting models, Time series, market expectations, sovereign bond spreads, survey data, Consensus Economics.

JEL Classification: E62, G10, H30

Suggested Citation

Cimadomo, Jacopo and Claeys, Peter and Poplawski-Ribeiro, Marcos, How Do Experts Forecast Sovereign Spreads? (May 2016). IMF Working Paper No. 16/100. Available at SSRN: https://ssrn.com/abstract=2882513

Jacopo Cimadomo (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Peter Claeys

Vrije Universiteit Brussel (VUB) - Faculty of Economic, Social and Political Sciences ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 191
B-1050 Brussels
Belgium

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Marcos Poplawski-Ribeiro

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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