Abstract
With the outbreak of the Greek financial crisis in late 2009, spreads on Greek (and other) sovereigns reached unprecedented levels. Using a panel data of euro-area countries, we test whether the markets treated all euro-area countries in an equal manner over the period 1998:m1 to 2012:m6. An F test of the pooling assumptions suggests that Greece, Ireland, and Portugal were not part of the overall pool. In a separate test on the individual coefficients we find that the coefficients on these three countries moved in a similar direction away from the pool, suggesting that markets treated these three countries more acutely than the rest of the pool.
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Notes
The extent, however, that the increase in sovereign spreads during 2011 and 2012 in Greece, for example, possibly reflected expectations of a possible departure of that country from the euro area, currency risk may not have been completely eliminated.
This variable is semi-annual but is not interpolated in the usual way to get monthly data; rather it is constructed to prevent news events occurring before they were actually announced.
We have chosen these two not only partly because they deal with the two main possible types of heteroskedasticity, cross section and time series, but also partly because having tried a number of other adjustments these proved to give the two extremes of correction from the standard test and hence they give a range of possible adjustment.
See Gibson et al. (2012) for a discussion of the unfolding of the euro-area crisis.
See Baltagi (2008), chap. 4, for a discussion of tests of hypotheses with panel data.
References
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Acknowledgments
We are grateful to Harris Dellas for valuable comments.
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Gibson, H.D., Hall, S.G. & Tavlas, G.S. Are all sovereigns equal? A test of the common determination of sovereign spreads in the euro area. Empir Econ 48, 939–949 (2015). https://doi.org/10.1007/s00181-014-0825-7
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DOI: https://doi.org/10.1007/s00181-014-0825-7