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

Journal of Financial Econometrics

74 Pages Posted: 15 Apr 2020 Last revised: 21 Jun 2022

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Roberto Savona

University of Brescia - Department of Economics and Management

Alessi Lucia

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

Date Written: June 21, 2020

Abstract

We employ a LASSO-based extension of the Fama-MacBeth procedure to characterize the time-varying dependence of sovereign Credit Default Swap (CDS) spreads on macro indicators during the samples 2009-2013 and 2013-2020. While CDS spreads are mainly reflective of fundamentals, this relationship varies substantially over time, leading to price variation that appears unrelated to fundamentals. The estimated LASSO coefficients are used to endogenously identify macro-sensitivity "regimes" of variation, consistently with a multiple-equilibrium view of the sovereign debt markets.

Keywords: macroeconomic fundamentals, CDS spreads, LASSO

JEL Classification: G12

Suggested Citation

Balduzzi, Pierluigi and Savona, Roberto and Lucia, Alessi, Anatomy of a Sovereign Debt Crisis: Machine Learning, Real-time Macro Fundamentals, and CDS Spreads (June 21, 2020). Journal of Financial Econometrics, Available at SSRN: https://ssrn.com/abstract=3548727 or http://dx.doi.org/10.2139/ssrn.3548727

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
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Chestnut Hill, MA 02467
United States
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Roberto Savona

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

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

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

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