Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144471
Authors: 
Dewachter, Hans
Iania, Leonardo
Lyrio, Marco
de Sola Perea, Maite
Year of Publication: 
2014
Series/Report no.: 
Working Paper Research 259
Abstract: 
We estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin, Priebsch, and Singleton (2013). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005-2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011.
Subjects: 
Euro area sovereign bonds
yield spread decomposition
unspanned macro factors
fair spreads
JEL: 
E43
E44
E47
Document Type: 
Working Paper

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