|Title:||Risk aversion, macro factors and non-fundamental components in Euro area yield spreads|
|Other Titles:||A macro-financial analysis|
|Abstract:||This paper investigates the effects of economic fundamentals and a common risk factor that is not accounted for by Euro area fundamentals on Euro area yield spreads. In particular, it seeks to disentangle the effects of changes in risk aversion and the common risk factor. For this purpose, I use a multi-country macro-finance model of the term structure, where changes in risk-aversion are captured by one single variable. This risk aversion variable is identified from restrictions on the pricing kernel to be the single source of time variation in the prices of risk. The model is applied to yield data of French, German, Italian and Spanish government bonds and the estimation is conducted using Bayesian estimation techniques. The results show that although economic fundamentals were the most dominant driver of Euro area yield spreads, the common risk factor accounts for a non-negligible part in Euro area yield spreads. Notably, the contribution of common risk factor shocks to the yield spreads increased from 2012 onwards. Among the economic factors, changes in risk aversion were the most important source for variations in yield spreads.|
|Appears in Collections:||Sonderforschungsbereich (SFB) 823|
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|DP_0416_SFB823_Herrmann.pdf||DNB||561.91 kB||Adobe PDF||View/Open|
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