Research

Research Projects

Testing for the Validity of W in GVAR Models

with Bertrand Candelon
Latest version available here
Abstract: In a globalized world, modeling macro-financial interconnections is fundamental for meaningful inferences. Global Vector Autoregressive models (GVARs) offer an easy and intuitive framework to deal with foreign information when modeling local markets/economies. Local VARs are augmented by the weighted average of foreign counterparts, employing pre-specified distance matrices justified by economic theory, but not empirically tested. We therefore propose a Likelihood Ratio Test for the validity of the proposed distance proxy. In the empirical application regarding euro area sovereign bond yields, we show that existing literature neglected a fundamental feature, the sign of the interconnection. Interestingly, the nonrejected matrix outlines the presence of contagion and flight-to-quality mechanisms in the euro area sovereign bond market well before the euro area debt crisis.
Supplementary Material

Risk Premia inside the Euro Area Government Bond Market

with Leonardo Iania
Abstract: We assess the contribution of common and idiosyncratic risk factors in the behavior of sovereign bond yields, spreads, and risk premia in the Euro Area. Using the no-arbitrage affine term structure model of interest rates proposed by Dewachter et al. (2015), we decompose expected excess returns in fundamental risk factors. We disentangle between (i) euro area wide financial factors, i.e. global tension in the financial markets, flight-to-liquidity, and Euro devaluation risk; and (ii) idiosyncratic financial factors, i.e. country specific credit and liquidity risks. The model captures most of the observed variation in realized excess returns. We detect a fragmented behavior both in terms of heterogeneous response of countries yields, spreads and risk premia to euro area wide factors, and in terms of local risks centrality on one-year-ahead forecast excess returns.

Price Expectations Co-movement in Global Housing Markets

with Itzhak Ben-David , Pascal Towbin , and Sebastian Weber
Abstract: We propose and implement a new method to estimate the role of price expectations driving housing prices in international data. Expectations can be identified based on observing an increasing number of vacant homes during periods of increasing prices. Estimating country-specific Vector Autoregressive models for 13 countries and using sign restrictions, we show that the derived price expectation series correlates well with other measures of expectations derived from the International Monetary Fund forecasts, providing outside validation to the method. Our preliminary results show that expectation shocks, together with mortgage rate shocks are the main determinants of fluctuations in house prices around the world. Moreover, they account for most of the co-movement of housing prices across countries, with global factors explaining up to 60 percent of the variation in house prices, especially for financially interconnected economies. While national housing supply and demand determinants tend to account for the observed trends in housing prices, the global mortgage and expectations-driven components account for the boom-bust fluctuations observed in selected economies during the global 2006 housing boom.

Fragmentation in the European Monetary Union: Is it really over?

with Bertrand Candelon and Francesco Roccazzella
Journal of International Money and Finance, doi: https://doi.org/10.1016/j.jimonfin.2021.102545
Abstract: Sovereign bond market fragmentation represents one of the major challenges European authorities have had to tackle since the outburst of the euro area debt crisis in 2010. By investigating the inter-country shock transmission through a new methodology that reconciles Factor and Global Vector Autoregressive models, we first show that fragmentation risk well preceded the sovereign debt crisis outburst. Most importantly, by analyzing the recent period, we document a rise in fragmentation risk in the euro area during the COVID pandemic. This rise, connected to the pressure on public debts and deficits due to the pandemic period, questions the European integration process and calls for early measures to avoid a new sovereign debt crisis.