Regime-Dependent Sovereign Risk Pricing During the Euro Crisis

Anne‐Laure Delatte · Julien Fouquau · Richard D. Portes

56 citations0/0 files storedEuropean Finance Review

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Credit Risk and Financial Regulations Global Financial Crisis and Policies European Monetary and Fiscal Policies

Abstract

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.

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References

2008Market Liquidity and Funding Liquidity 2002SMOOTH TRANSITION AUTOREGRESSIVE MODELS — A SURVEY OF RECENT DEVELOPMENTS 2011How Sovereign Is Sovereign Credit Risk?2014A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk 1996Determinants and Impact of Sovereign Credit Ratings 2012Self-fulfilling crises in the Eurozone: An empirical test 2007Determinants and Impact of Sovereign Credit Ratings 2011A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk

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