Abstract
This project studies and models key macroeconomic variables and their impact on sovereign risk premia across select European economies and developed countries. The sample is divided into three groups of countries: those in the European Monetary Union (EMU); the standalone economies outside the EMU but members of the broader European Union (EU); and other developed economies. The main subject of examination across all three groups is the impact of macroeconomic variables on sovereign borrowing costs. EU countries have experienced high financial stress and a rapid rise in the credit default swaps (CDS) spreads during the EMU debt crisis. A nonlinear vector smooth transition autoregressive model is applied to investigate such a regime change in the finance-output link using sovereign CDS and industrial production index. The paper finds that regime-switching takes place rather suddenly in most EMU countries. The study concludes that due to the potential spillover effects in the EU as a whole, the individual country macroeconomic indicators were less reflected in the financial stress and spillover and contagion effects became dominant.
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Acknowledgments
We would like to thank two anonymous reviewers for their helpful comments and suggestions on the earlier draft of this paper.
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Appendices
Appendix 1: Background of the selected Countries
Appendix 2: Empirical analysis
See Figs. 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31 and 32.
SACF for returns
SACF for return (continued)
SACF for normalized error
SACF for normalized error
Sample log returns versus GARCH simulated returns
Sample log returns versus GARCH simulated returns
Transition function of Poland and Hungary
Transition function of Czech Republic and Ireland
Transition function of US and Japan
Transition function of Italy and Spain
Transition function of UK and Greece
Impulse Response Poland (high and low regimes)
Impulse Response Hungary (high and low regimes)
Impulse Response the Czech Republic (high and low regimes)
Impulse Response Ireland (high and low regimes)
Impulse Response Italy (high and low regimes)
Impulse Response the United States (high and low regimes)
Impulse Response Japan (high and low regimes)
Impulse Response the UK (high and low regimes)
Impulse Response Greece (high and low regimes)
Impulse Response Spain (high and low regimes)
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Gevorkyan, A., Semmler, W. Macroeconomic variables and the sovereign risk premia in EMU, non-EMU EU, and developed countries. Empirica 43, 1–35 (2016). https://doi.org/10.1007/s10663-015-9286-2
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DOI: https://doi.org/10.1007/s10663-015-9286-2