nep-ifn New Economics Papers
on International Finance
Issue of 2016‒08‒28
one paper chosen by
Vimal Balasubramaniam
University of Oxford

  1. Bond risk premia, macroeconomic factors and financial crisis in the euro area By Garcí­a, Juan Angel; Werner, Sebastian E. V.

  1. By: Garcí­a, Juan Angel; Werner, Sebastian E. V.
    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
    Keywords: bond risk premium, financial crisis, macro factors, model selection, variable selection
    Date: 2016–07

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