A1 - Erica Perego
TI - Sovereign Risk and Asset Market Dynamics in the Euro Area
IS - 2018-18
T3 - Working Papers
KW - Currency Union
KW - International Financial Markets
KW - Sovereign Risk
KW - General Equilibrium
N2 - This paper studies the behavior of euro area asset market co-movements during the period 2010-2014, through the lens of a DSGE model. The economy is a two-country world consisting of a core and a periphery and featuring an international banking sector, international equity markets, home bias in sovereign bond holdings, and sovereign default. The periphery is buffeted by a sovereign risk shock, whose process is estimated from the data. The model accounts successfully for the divergence in core-periphery correlations between stock and sovereign bond returns. The simulation results indicate that the sovereign risk shock explains 50% of the increase in sovereign and loandeposit spreads, and 8% of the decrease in global output during the sovereign debt crisis.
ER -