Credit and liquidity risks in euro area sovereign yield curves

摘要: In this paper, we propose a model of the joint dynamics euro-area sovereign yield curves. The arbitrage-free valuation framework involves five factors and two regimes, one latter being interpreted as crisis regime. These common regimes explain most fluctuations in yields spreads. regime-switching feature turns out to be particularly relevant capture rise volatility experienced by fixed-income markets over last years. our reduced-form set up, each country is characterized hazard rate, specified some linear combinations regimes. rates incorporate both liquidity credit components, that aim at disentangling. estimation suggests substantial share changes differentials liquidity-driven. Our approach consistent with fact default risk not diversifiable, which gives specific premia are incorporated Once liquidity-pricing effects filtered spreads, obtain estimates actual –or real-world– probabilities. turn significantly lower than their risk-neutral counterparts.