Eurozone Sovereign Yield Spreads and Diverging Economic Fundamentals

47 Pages Posted: 9 Jul 2013

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Maurizio Luisi

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2013

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.

Keywords: real-time economic growth, sovereign yield spread

JEL Classification: G12

Suggested Citation

Beber, Alessandro and Brandt, Michael W. and Luisi, Maurizio, Eurozone Sovereign Yield Spreads and Diverging Economic Fundamentals (July 1, 2013). CEPR Discussion Paper No. DP9538, Available at SSRN: https://ssrn.com/abstract=2291339

Alessandro Beber (Contact Author)

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Michael W. Brandt

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Maurizio Luisi

affiliation not provided to SSRN

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