Regime-dependent sovereign risk pricing during the Euro Crisis

Delatte, Anne-Laure; Fouquau, Julien; Portes, Richard

Regime-dependent sovereign risk pricing during the Euro Crisis

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Citation

Delatte, A, Fouquau, J, Portes, R. Regime-dependent sovereign risk pricing during the Euro Crisis. 2016. handle: http://hdl.handle.net/10230/27700

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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 one year to restore the non crisis regime and suppress the extra premium.