| Abstract: |
This paper investigates the power of macroeconomic factors to explain euro
area bond risk premia using (i) a large dataset that captures the nowadays
data-rich environment (ii) the Elastic Net variable selection. We find that
macroeconomic factors, in particular economic activity and sentiment
indicators, explain 40% of the variability of risk premia before the crisis,
and up to 55% during the financial crisis, and both for core countries (from
40% to 60%) and periphery countries (from 35% to 44%). Moreover, macroeconomic
factor models clearly outperform financial indicators like the CP-factor and
credit default swap (CDS) premia, even in periods of significant market
turbulence. JEL Classification: E43, E44, G01, G12, C52, C55 |