Quantifying Risks to Sovereign Market Access: Methods and Challenges

87 Pages Posted: 16 Jan 2020

See all articles by Diana Zigraiova

Diana Zigraiova

Charles University in Prague

Aitor Erce

European Union - European Investment Bank; European University Institute

Xu Jiang

European Stability Mechanism

Multiple version iconThere are 3 versions of this paper

Date Written: January 6, 2020

Abstract

In this paper we use data from the euro area to study episodes when sovereigns lose market access. We construct a detailed dataset with potential indicators of market access tensions, and evaluate their ability to forecast episodes when market access is lost, using various econometric approaches. We find that factors associated with high market access tensions are not limited to financial markets, but also encompass developments in global demand, macroeconomic conditions and the fiscal stance. Using the top-performing indicators, we construct a number of market tension indices and use them as single predictors of market access tensions. While such indices are helpful in capturing worsening conditions, they do not yield satisfactory out-of-sample results. On the other hand, using the same top- performing indicators in various multivariate models generates good forecasts of upcoming difficulties in accessing sovereign bond markets. Our results thus point to a trade-off between communicability and accuracy that policymakers face in the search for tools to evaluate risks to market access.

Keywords: Euro area sovereign bond market; forecasting; sovereign debt crises, sovereign market access; variable selection

JEL Classification: C53, G01, G15

Suggested Citation

Zigraiova, Diana and Erce, Aitor and Jiang, Xu, Quantifying Risks to Sovereign Market Access: Methods and Challenges (January 6, 2020). European Stability Mechanism Working Paper No. 42. Available at SSRN: https://ssrn.com/abstract=3520502 or http://dx.doi.org/10.2139/ssrn.3520502

Diana Zigraiova (Contact Author)

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

Aitor Erce

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Xu Jiang

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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