Dynamics of the European sovereign bonds and the identification of crisis periods

Abstract

We develop an empirical model of heterogeneous agents to study the dynamics of the European sovereign bonds market. Agents make use of different information from the CDS market and historical price movements of the sovereign bonds for their trading decisions. Subject to the perceived sovereign risk, agents exhibit changing trading behaviors in high-risk periods and tranquil times. To compare the ability of our model to identify crises periods, we also run a generalized sup ADF test as suggested in Phillips et al. (Int Econ Rev 56(4):1043–1078, 2015). Our results indicate that the smooth transition regression framework may provide additional valuable information regarding the timing of crisis events.