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Empirical Economics
Published in: Empirical Economics 3/2015

01-05-2015

Are all sovereigns equal? A test of the common determination of sovereign spreads in the euro area

Authors: Heather D. Gibson, Stephen G. Hall, George S. Tavlas

Published in: Empirical Economics | Issue 3/2015

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Abstract

With the outbreak of the Greek financial crisis in late 2009, spreads on Greek (and other) sovereigns reached unprecedented levels. Using a panel data of euro-area countries, we test whether the markets treated all euro-area countries in an equal manner over the period 1998:m1 to 2012:m6. An F test of the pooling assumptions suggests that Greece, Ireland, and Portugal were not part of the overall pool. In a separate test on the individual coefficients we find that the coefficients on these three countries moved in a similar direction away from the pool, suggesting that markets treated these three countries more acutely than the rest of the pool.
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Footnotes
1
The extent, however, that the increase in sovereign spreads during 2011 and 2012 in Greece, for example, possibly reflected expectations of a possible departure of that country from the euro area, currency risk may not have been completely eliminated.
 
2
This variable is semi-annual but is not interpolated in the usual way to get monthly data; rather it is constructed to prevent news events occurring before they were actually announced.
 
3
We have chosen these two not only partly because they deal with the two main possible types of heteroskedasticity, cross section and time series, but also partly because having tried a number of other adjustments these proved to give the two extremes of correction from the standard test and hence they give a range of possible adjustment.
 
4
See Gibson et al. (2012) for a discussion of the unfolding of the euro-area crisis.
 
5
See Baltagi (2008), chap. 4, for a discussion of tests of hypotheses with panel data.
 
Literature
Baltagi BH (2008) Econometric analysis with panel data, 4th edn. John Wiley, Chichester
Baltagi BH, Bresson G, Pirotte A (2008) To pool or not to pool, chap. 16. In: Matyas L, Sevestre P (eds) The econometrics of panel data: fundamentals and recent developments in theory and practise. Springer, Heidelberg
De Grauwe P, Ji Y (2013) Self-fulfilling crises in the Eurozone: an empirical test. J Int Money Financ 34:15–36CrossRef
Gibson HD, Hall SG, Tavlas GS (2012) The Greek financial crisis: growing imbalances and sovereign spreads. J Int Money Financ 31:498–516CrossRef
Pesaran MH, Smith R (1995) Estimating long run relationships from dynamic heterogeneous panels. J Econom 68:79–113
Pesaran MH, Shin Y, Smith R (1999) Pooled mean group estimation of dynamic heterogeneous panels. J Am Stat Soc Assoc 94:621–634
Metadata
Title
Are all sovereigns equal? A test of the common determination of sovereign spreads in the euro area
Authors
Heather D. Gibson
Stephen G. Hall
George S. Tavlas
Publication date
01-05-2015
Publisher
Springer Berlin Heidelberg
Published in
Empirical Economics / Issue 3/2015
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI
https://doi.org/10.1007/s00181-014-0825-7

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