Anatomy of a Sovereign Debt Crisis: Machine Learning, Real-time Macro Fundamentals, and CDS Spreads

60 Pages Posted: 15 Apr 2020 Last revised: 26 May 2020

See all articles by Alessi Lucia

Alessi Lucia

Joint Research Center of the European Commission; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Pierluigi Balduzzi

Boston College - Carroll School of Management

Roberto Savona

University of Brescia - Department of Economics and Management

Date Written: March 4, 2020

Abstract

We study the time-varying dependence of sovereign credit default swap (CDS) spreads on real-time, country-specific macro indicators during the eurozone sovereign debt crisis. Macro fundamentals explain 66% of the time-series variance of CDS spreads, but the time variation in macro sensitivities is also important, explaining close to 30% of the variance. Hence, while CDS spreads reflect macro fundamentals, they also display volatility unrelated to fundamentals. We identify distinct "regimes" of variation, consistent with a multiple-equilibrium view of the sovereign debt markets. Our estimated macro sensitivities predict the VSTOXX European equity volatility index out of sample.

Keywords: CDS spreads, macro fundamentals, eurozone crisis

JEL Classification: G12

Suggested Citation

Lucia, Alessi and Balduzzi, Pierluigi and Savona, Roberto, Anatomy of a Sovereign Debt Crisis: Machine Learning, Real-time Macro Fundamentals, and CDS Spreads (March 4, 2020). Available at SSRN: https://ssrn.com/abstract=3548727 or http://dx.doi.org/10.2139/ssrn.3548727

Alessi Lucia

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Ispra (VA), I-21027
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Roberto Savona

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

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