Sovereign Spreads: Global Risk Aversion, Contagion or Fundamentals?

By Carlos Caceres, Vincenzo Guzzo, Miguel A. Segoviano Basurto. Social Science Research Network, 2010

279 citations recorded by the source corpus.

Over the past year, euro area sovereign spreads have exhibited an unprecedented degree of volatility. This paper explores how much of these large movements reflected shifts in (i) global risk aversion (ii) country-specific risks, directly from worsening fundamentals, or indirectly from spillovers originating in other sovereigns. The analysis shows that earlier in the crisis, the surge in global risk aversion was a significant factor influencing sovereign spreads, while recently country-specific factors have started playing a more important role. The perceived source of contagion itself has changed: previously, it could be found among those sovereigns hit hard by the financial crisis, such as Austria, the Netherlands, and Ireland, whereas lately the countries putting pressure on euro area government bonds have been primarily Greece, Portugal, and Spain, as the emphasis has shifted towards short-term refinancing risk and long-term fiscal sustainability. The paper concludes that debt sustainability and appropriate management of sovereign balance sheets are necessary conditions for preventing sovereign risk from feeding back into broader financial stability concerns.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/d27d71014855f86d72cb19b4820e9eb62dd659c4

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Citations in the corpus

The “Big C”: identifying and mitigating contagion (2012, unknown): “…otherwise occur (such as bank runs or markets that stop functioning) versus a policy response that would simply delay an 36 See Constancio (2012), De Santis (2012), and Caceres et al. (2010) for evidence of contagion from the euro crisis.”
Mispricing of Sovereign Risk and Macroeconomic Stability in the Eurozone (2012, background): “…the determinants of the spreads in the eurozone (Attinasi et al., 2009; Arghyrou and Kontonikas, 2010; Gerlach et al., 2010; Schuknecht et al., 2011; Caceres et al., 2010; Caporale and Girardi, 2011; Gibson et al., 2011).1 One of the novel features of this article is to compare the eurozone…”
The Dynamics of Spillover Effects during the European Sovereign Debt Turmoil (2014, unknown): “In this paper, we propose a new methodology that complements contagion methodologies developed by Caceres et al. (2010), Caporin et al. (2012), Claeys and Vašíček (2012), De Santis (2012), Donati (2011) and Zhang et al. (2011). Dungey et al.”
Systemic Risk, Sovereign Yields and Bank Exposures in the Euro Crisis (2014, background): “(2009) and De Santis (2012) proxy risk aversion by the spread between the US AAA corporate bonds and the US 10-year sovereign bonds, Caceres et al. (2010) estimate it as the market price of risk of a stress event, and Sgherri and Zoli (2009) measure it as a latent common factor in spreads by estimat”
Determinants of Emerging Market Sovereign Bond Spreads: Fundamentals vs Financial Stress (2010, unknown): “Caceres, Guzzo, and Segoviano (2010) model sovereign spreads on joint probabilities of distress, extracted from credit default swap spreads, controlling for global risk aversion and macroeconomic fundamentals.”
The Determinants of Sovereign Bond Yield Spreads in the EMU (2012, methodology): “2 In this process, the role of domestic banking sectors is crucial, as suggested by Candelon and Palm (2010), Gerlach et al.”