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Sovereign spreads and economic fundamentals: an econometric analysis

Author

Listed:
  • Donato Ceci

    (Bank of Italy)

  • Marcello Pericoli

    (Bank of Italy)

Abstract

This paper provides an estimate of the fair value of the Italian ten-year sovereign spread, defined as a value consistent with the country’s macroeconomic fundamentals. It uses a multi-country model in which the spreads of the government bond yields of Italy, France and Spain with respect to the German bond yield are regressed on a set of fundamental macroeconomic variables and a set of variables approximating the risk perception of investors, for the period January 2007 – June 2022. The results show that, in the last ten years, the observed level has often been above the fair value, with significant upward deviations during periods of market tensions and/or political uncertainty. The dynamics of the debt-to-GDP ratio and those of expected growth show, respectively, a positive and a negative relationship with the trend of the fair value. In the last two years, expected inflation has also played an important role: while its decline exerted a downward effect on the fair value in 2020 and for part of 2021, the increase observed since the last quarter of 2021 has led to a rise in the fair value.

Suggested Citation

  • Donato Ceci & Marcello Pericoli, 2022. "Sovereign spreads and economic fundamentals: an econometric analysis," Questioni di Economia e Finanza (Occasional Papers) 713, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_713_22
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    Cited by:

    1. Arnold, Ivo J.M., 2024. "The effect of fragmentation risk on monetary conditions in the euro area," Journal of International Money and Finance, Elsevier, vol. 146(C).
    2. Jan Kakes & Jan Willem van den End, 2023. "Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals?," Working Papers 778, DNB.
    3. Pietro Munari, 2024. "The Impact of Market Sentiment and Macroeconomic Fundamentals on Government Bond (Mis)-pricing," BAFFI CAREFIN Working Papers 24228, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    More about this item

    Keywords

    sovereign bond spread; macroeconomic fundamentals; risk aversion;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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