The Response of Euro Area Sovereign Spreads to the ECB Unconventional Monetary Policies

National Bank of Belgium Working Paper No. 309 - October 2016

56 Pages Posted: 20 Sep 2017

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

Jean-Charles Wijnandts

Catholic University of Louvain (UCL) - Louvain Finance (LFIN)

Date Written: October 14, 2016

Abstract

We analyse variations in sovereign bond yields and spreads following unconventional monetary policy announcements by the European Central Bank. Using a two-country, arbitrage-free, shadow-rate dynamic term structure model (SR-DTSM), we decompose countries’ yields into expectation and risk premium components. By means of an event study analysis, we show that the ECB’s announcements reduced both the average expected instantaneous spread and risk repricing components of Italian and Spanish spreads. For countries such as Belgium and France, the ECB announcements impacted primarily the risk repricing component of the spread.

Keywords: Term Structure of Interest Rates, Lower Bound, Nonlinear State-Space Model, Monetary Policy Expectations, Unconventional Monetary Policy

JEL Classification: C32, E43, E52

Suggested Citation

Dewachter, Hans and Iania, Leonardo and Wijnandts, Jean-Charles, The Response of Euro Area Sovereign Spreads to the ECB Unconventional Monetary Policies (October 14, 2016). National Bank of Belgium Working Paper No. 309 - October 2016, Available at SSRN: https://ssrn.com/abstract=3038685

Hans Dewachter

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/

Jean-Charles Wijnandts (Contact Author)

Catholic University of Louvain (UCL) - Louvain Finance (LFIN) ( email )

Voie du Roman Pays, 34 - L1.03
Louvain-la-Neuve, 1348
Belgium

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