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What are the driving factors behind the rise of spreads and CDS of euro-area sovereign bonds? A FAVAR model for Greece and Ireland
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posted on 2023-06-08, 16:51 authored by Nicholas Apergis, Emmanuel MamatzakisThis paper examines the dynamics of selected euro-area sovereign bonds by employing a factor augmenting vector autoregressive (FAVAR) model for the first time in the literature. This methodology identifies the underlying transmission mechanisms of several factors, and in particular, market liquidity and credit risk. Departing from the classical vector autoregressive (VAR) models allows us to relax limitations regarding the choice of variables that could drive spreads and CDS of euro-area sovereign debts. The results show that liquidity, credit risk and flight to quality drive both spreads and CDS of five years maturity over swaps for Greece and Ireland in recent years. Greece, in particular, is facing an elastic demand for its sovereign bonds that further stretches liquidity. Moreover, in illiquid debt markets spreads continue to follow a steep upward trend which is expected to have certain adverse implications for financial stability. We also observe a negative feedback effect from counterparty credit risk.
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Publication status
- Published
Journal
International Journal of Economics and Business ResearchISSN
1756-9850Publisher
InderscienceExternal DOI
Issue
1Volume
7Page range
104-120Department affiliated with
- Business and Management Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2014-03-12Usage metrics
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