Quantifying risks to sovereign market access: Methods and challenges
Download PDF: Working Paper 42
This paper uses a rich dataset of financial and macroeconomic variables for euro area economies, and a range of econometric techniques, to discuss challenges in predicting episodes of market access tensions by sovereign borrowers.
Authors: Diana Žigraiová (ESM, Charles University), Aitor Erce (European Investment Bank, European University Institute) and Xu Jiang (ESM)
In this paper we use data from the euro area to study episodes when sovereigns lose market access. We construct a detailed dataset with potential indicators of market access tensions, and evaluate their ability to forecast episodes when market access is lost, using various econometric approaches. We find that factors associated with high market access tensions are not limited to financial markets, but also encompass developments in global demand, macroeconomic conditions and the fiscal stance. Using the top-performing indicators, we construct a number of market tension indices and use them as single predictors of market access tensions. While such indices are helpful in capturing worsening conditions, they do not yield satisfactory out-of-sample results. On the other hand, using the same top- performing indicators in various multivariate models generates good forecasts of upcoming difficulties in accessing sovereign bond markets. Our results thus point to a trade-off between communicability and accuracy that policymakers face in the search for tools to evaluate risks to market access.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Euro area sovereign bond market; forecasting; sovereign debt crises, sovereign market access; variable selection
JEL codes: C53, G01, G15