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Title: Eurozone Sovereign Yield Spreads and Diverging Economic Fundamentals

Author(s): Alessandro Beber, Michael Brandt and Maurizio Luisi

Publication Date: July 2013

Keyword(s): real-time economic growth and sovereign yield spread

Programme Area(s): Financial Economics

Abstract: We construct daily real-time macroeconomic indices conditional on the rating of Eurozone countries. We uncover substantial explanatory power of our measures of economic fundamentals for yield dynamics beyond the traditional yield principal components. In particular, we find that the divergence in economic growth between AAA and non-AAA countries significantly explains the dynamics of sovereign yield spreads between the same groups of countries. The explanatory power of fundamentals is not subsumed by proxies of time-varying risk-aversion or by the perceived riskiness of the Eurozone banking sector. Finally, we cast this analysis of the Eurozone sovereign yields in an innovative term structure model, featuring our real-time macroeconomic factors conditional on country ratings.

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Bibliographic Reference

Beber, A, Brandt, M and Luisi, M. 2013. 'Eurozone Sovereign Yield Spreads and Diverging Economic Fundamentals'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9538