Working Paper: CEPR ID: DP9538
Authors: Alessandro Beber; Michael Brandt; Maurizio Luisi
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 sovereignyields 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 Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| divergence in economic growth (F62) | dynamics of sovereign yield spreads (E43) |
| real-time macroeconomic indices (E39) | yield dynamics (E43) |
| economic fundamentals (E25) | yield dynamics (E43) |
| divergence in economic growth (F62) | yield spreads (G12) |
| time-varying risk aversion (D11) | yield dynamics (E43) |
| perceived banking sector risk (G21) | yield dynamics (E43) |