Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174126
Authors: 
Afonso, António
Arghyrou, Michael Georgiou
Gadea Rivas, María Dolores
Kontonikas, Alexandros
Year of Publication: 
2017
Series/Report no.: 
Cardiff Economics Working Papers E2017/12
Abstract: 
This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
Subjects: 
euro area
spreads
crisis
time-varying relationship
unconventional monetary policy
JEL: 
E43
E44
F30
G01
G12
Document Type: 
Working Paper
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