Are European sovereign bonds fairly priced? The role of modelling uncertainty

Leo de Haan, Jeroen Hessel, Jan Willem van den End

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

This paper examines the extent to which large swings of sovereign yields in euro area countries during the debt crisis can be attributed to fundamentals, focusing on the inherent uncertainty in bond yield models. We show that the outcomes are strongly affected by modelling choices with regard to i) the confidence bands for the model prediction, ii) the assumption whether the model coefficients are similar across countries or not, iii) the sample selection, iv) the inclusion of financial variables and v) the choice of time-varying coefficients. These choices affect the explanatory power of macro fundamentals and the extent of mispricing. © 2014 Elsevier Ltd.
Original languageEnglish
Pages (from-to)239-267
Number of pages29
JournalJournal of International Money and Finance
Volume47
DOIs
Publication statusPublished - 2014
Externally publishedYes

Keywords

  • Interest rate
  • Risk premium
  • Sovereign bond

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