Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154371
Authors: 
Garcí­a, Juan Angel
Werner, Sebastian E. V.
Year of Publication: 
2016
Series/Report no.: 
ECB Working Paper 1938
Abstract: 
This paper investigates the power of macroeconomic factors to explain euro area bond risk premia using (i) a large dataset that captures the nowadays data-rich environment (ii) the Elastic Net variable selection. We find that macroeconomic factors, in particular economic activity and sentiment indicators, explain 40% of the variability of risk premia before the crisis, and up to 55% during the financial crisis, and both for core countries (from 40% to 60%) and periphery countries (from 35% to 44%). Moreover, macroeconomic factor models clearly outperform financial indicators like the CP-factor and credit default swap (CDS) premia, even in periods of significant market turbulence.
Subjects: 
bond risk premium
financial crisis
macro factors
model selection
variable selection
JEL: 
E43
E44
G01
G12
C52
C55
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2186-2
Document Type: 
Working Paper

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