Bond risk premia, macroeconomic factors and financial crisis in the euro area

Arbeitspapier

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.

Object Details

• ISBN: 978-92-899-2186-2
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1938

Classification and Topics

• Classification: Wirtschaft ; Interest Rates: Determination, Term Structure, and Effects ; Financial Markets and the Macroeconomy ; Financial Crises ; Asset Pricing; Trading Volume; Bond Interest Rates ; Model Evaluation, Validation, and Selection ; Large Data Sets: Modeling and Analysis
• Subject: bond risk premium ; financial crisis ; macro factors ; model selection ; variable selection

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Garcí­a, Juan Angel ; Werner, Sebastian E. V.
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2016

Further information

• DOI: doi:10.2866/633700
• Handle: http://hdl.handle.net/10419/154371
• Last update: 10.03.2025, 11:45 AM CET