‘Whatever It Takes’ to Resolve the European Sovereign Debt Crisis? Bond Pricing Regime Switches and Monetary Policy Effects

40 Pages Posted: 21 Nov 2017

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

Michael Arghyrou

University of Piraeus

Maria Dolores Gadea Rivas

University of Zaragoza

Alexandros Kontonikas

Essex Business School

Date Written: October 18, 2017

Abstract

This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk.

Keywords: Euro Area, Spreads, Crisis, Time-Varying Relationship, Unconventional Monetary Policy

JEL Classification: E430, E440, F300, G010, G120

Suggested Citation

Afonso, António and Arghyrou, Michael and Gadea Rivas, Maria Dolores and Kontonikas, Alexandros, ‘Whatever It Takes’ to Resolve the European Sovereign Debt Crisis? Bond Pricing Regime Switches and Monetary Policy Effects (October 18, 2017). CESifo Working Paper Series No. 6691, Available at SSRN: https://ssrn.com/abstract=3074324 or http://dx.doi.org/10.2139/ssrn.3074324

António Afonso

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://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

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://uece.rc.iseg.ulisboa.pt/

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

Michael Arghyrou (Contact Author)

University of Piraeus ( email )

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

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

Maria Dolores Gadea Rivas

University of Zaragoza ( email )

Gran Via 2
Zaragoza, 50005
Spain

Alexandros Kontonikas

Essex Business School ( email )

University of Essex
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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