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Regime-dependent sovereign risk pricing during the Euro crisis

Journal

Review of Finance

Subject

Economics

Publishing details

Review of Finance 2016 Vol 27:1 p 363-385

Authors / Editors

Delatte A-L;Fouquau J;Portes R

Biographies

Richard Portes

Publication Year

2016

Abstract

Previous work has documented a greater sensitivity of long-term government bond yields to fundamentals in euro area peripheral countries during the euro crisis, but we know little about the driver(s) of regime switches. Our estimates based on a panel smooth threshold regression model quantify and explain them: (1) investors have penalized a deterioration of fundamentals more strongly from 2010 to 2012; (2) the higher the bank credit risk, measured with the premium on credit derivatives, the higher the extra premium on fundamentals; (3) after ECB President Draghi’s speech in July 2012, it took 1 year to restore the noncrisis regime and suppress the extra premium.

Keywords

European sovereign crisis; Panel smooth transition regression models; CDS indices

Publication Notes

Published online 7th October 2016

Available on ECCH

No


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