An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis

Abstract

We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries. Moreover, the increase in the significance of the banking level of indebtedness and foreign bank's claims in the public sector (mainly in peripheral countries) along with the crisis unfolding seems to highlight the interconnection between private and public debt and thus, between banking and sovereign crises.

Time-varying dependence between stock and government bond returns: International evidence with dynamic copulas

“…Finally, the ARCH LM test statistics confirm the presence of significant ARCH effects in all return series, thus supporting the use of a GARCH-type model. These summary statistics are consistent with the stylized facts on stock and bond returns typically found in the previous literature (Brière et al, 2012;Gómez-Puig, Sosvilla-Rivero, & Ramos-Herrera, 2014;Lee et al, 2013;Scruggs & Glabadanidis, 2003). Table 2 reports the estimation results of the bivariate DCC-GARCH(1,1) model used to characterize the dynamic volatility and correlation structure between raw stock and government bond returns for Notes: This table shows the estimated parameters of the bivariate DCC-GARCH(1,1) models for all sampled countries.…”

Determinants of the Government Bond Yield in Spain: A Loanable Funds Model

“…Gómez-Puig, Sosvilla-Rivero, and del Carmen Ramos-Herrera [42] investigated sovereign bond spreads using the German government bond yield for selected central and peripheral countries during 1999-2012. Variables considered include the local market sentiment, the regional market sentiment, the global market sentiment, the local macro fundamentals, the regional macro fundamentals, and the financial linkages.…”

Volatility spillovers in EMU sovereign bond markets

“…Researchers have already used a variety of methodologies to study the transmission effects in euro area sovereign debt markets (correlation-based measures, conditional value-at-risk (CoVaR), or Granger-causality approach, among others) 2 : Kalbaska and Gatkowski (2012), Metiu (2012), Caporin et al (2013), Beirne and Fratzscher (2013), Gorea and Radev (2014), Gómez-Puig and Sosvilla-Rivero (2014) and Ludwig (2014) to name a few. Our paper adds to this literature by applying the methodology recently proposed by Diebold and Yilmaz (2012) to measure spillover effects using a generalized vector autoregressive framework in which forecast-error variance decompositions are invariant to the variable ordering.…”