Is the European Sovereign Crisis Self-Fulfilling?- Empirical Evidence About the Drivers of Market Sentiments

Anne Laure Delatte, Julien Fouquau, Catherine Bruneau
2012 Social Science Research Network  
We assess the nature of the European sovereign crisis in the light of a model borrowed from the second generation of currency crises. We bring the theory to the data to empirically test the presence of selffulfilling dynamics and to identify what may have driven the market sentiment during this crisis. To do so we estimate the probability of default of five European "peripheral" countries during January 2006 to September 2011 with a panel smooth threshold regression. Our estimation results
more » ... mation results suggest that 1/ both the fundamentals and "animal spirit" ignited the European sovereign crisis; 2/ the sovereign Credit Default Swap market (CDS) has served as a coordinating device for speculation.
doi:10.2139/ssrn.2116240 fatcat:lmqanmh6q5hkpfcmkixpkv2nma