Abstract
European sovereign debt markets have been under scrutiny since the sovereign debt crisis of 2009. In this paper, we study to what extent the extreme dynamics were driven by fundamentals or speculation. We do so by decomposing bond and CDS spreads into fundamental and non-fundamental parts using a heterogeneous agent model. We find that bond markets are driven for 80% by liquidity trading, 13% by credit news, and only 5.4% by speculation. The CDS market is for 49% driven by credit news, 45% liquidity trading, and 5.5% speculation. The relative importance of the different types of agents varies over time, though.
| Original language | English |
|---|---|
| Pages (from-to) | 245-265 |
| Number of pages | 21 |
| Journal | Journal of Economic Behavior and Organization |
| Volume | 169 |
| Early online date | 26 Nov 2019 |
| DOIs | |
| Publication status | Published - Jan 2020 |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 17 Partnerships for the Goals
Keywords
- Credit default swap
- Credit risk
- heterogeneous agent models
- sovereign bonds
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