This paper proposes an extension to Global Vector Autoregressive (GVAR) models to capture time-varying interdependence among financial variables. Government bond spreads in the euro area feature a time-varying pattern of co-movement that poses a serious challenge for econometric modelling and forecasting. This pattern of the data is not captured by the standard specification that model spreads as persistent processes reverting to a time-varying mean determined by two factors : a local factor, driven by fiscal fundamentals and growth, and a global world factor, driven by the market's appetite for risk. This paper argues that a third factor, expectations of exchange rate devaluation, gained traction during the crises. This factor is well captured via a GVAR that models the interdependence among spreads by making each country's spread function of global European spreads. Global spreads capture the exposure of each country's spread to other spreads in the euro area in terms of the time-varying "distance" between their fiscal fundamentals. This new specification dominates the standard one in modelling the time-varying pattern of comovements among spreads and the response of euro area spreads to the Greek debt crisis. Keywords: Global VAR, bond spreads in the euro-area, exchange rate premium

Modelling and forecasting government bond spreads in the euro area: a GVAR model

Favero, Carlo
2013

Abstract

This paper proposes an extension to Global Vector Autoregressive (GVAR) models to capture time-varying interdependence among financial variables. Government bond spreads in the euro area feature a time-varying pattern of co-movement that poses a serious challenge for econometric modelling and forecasting. This pattern of the data is not captured by the standard specification that model spreads as persistent processes reverting to a time-varying mean determined by two factors : a local factor, driven by fiscal fundamentals and growth, and a global world factor, driven by the market's appetite for risk. This paper argues that a third factor, expectations of exchange rate devaluation, gained traction during the crises. This factor is well captured via a GVAR that models the interdependence among spreads by making each country's spread function of global European spreads. Global spreads capture the exposure of each country's spread to other spreads in the euro area in terms of the time-varying "distance" between their fiscal fundamentals. This new specification dominates the standard one in modelling the time-varying pattern of comovements among spreads and the response of euro area spreads to the Greek debt crisis. Keywords: Global VAR, bond spreads in the euro-area, exchange rate premium
File in questo prodotto:
File Dimensione Formato  
acc_man.pdf

non disponibili

Tipologia: Documento in Pre-print (Pre-print document)
Licenza: NON PUBBLICO - Accesso privato/ristretto
Dimensione 438.71 kB
Formato Adobe PDF
438.71 kB Adobe PDF   Visualizza/Apri
1-s2.0-S030440761300081X-main.pdf

non disponibili

Descrizione: Articolo
Tipologia: Pdf editoriale (Publisher's layout)
Licenza: NON PUBBLICO - Accesso privato/ristretto
Dimensione 585.26 kB
Formato Adobe PDF
585.26 kB Adobe PDF   Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3814506
 Attenzione

Attenzione! I dati visualizzati non sono stati sottoposti a validazione da parte dell'ateneo

Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 65
  • ???jsp.display-item.citation.isi??? 64
social impact