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Chamadanai Marknual

First Name: Chamadanai
Surname: Marknual
Department Dept of Economics
Supervisor(s): Professor Jeffrey Sheen , Dr Natalia Ponomareva

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Paper Title

Spanish Sovereign Term Structure: an Implication for Sovereign Debt Crisis


Since 2009, concern about sovereign default risk widens the European bond spread. The Spanish spread surged due to larger-than-expected budget deficit. Therefore, term structure model that links fiscal exposure can explain how yield evolves during crisis.


Yield curve can be decomposed into latent factors. Nelson and Siegel (1987) fitted yield curve with exponential-polynomial factor loading. However, the yield evolution is also driven by macro-variables as in Diebold, Rudebusch and Aruoba (2006). So far, there is still lack of economic literatures that clarifies how fiscal variable affects yield.

Key literature/theoretical perspective

Regarding Schuknecht et. al. (2009), sovereign default risk determines spread. Wider spread implies higher risk-aversion. Borgy (2011) employed affine model to explain a large spread in Eurozone and found strong relationship between fiscal insolvency and yield.


This study used end-of-month Spanish yield and macro-variables, including budget deficit from 1998 to 2011. Yield is modelled by the Nelson-Siegel. Assuming latent factors and macro-variables follow a first order vector autoregressive process and presenting in a state space form, all parameters can be estimated by using prediction error decomposition of the likelihood and obtain optimal estimates via the Kalman filter.


The estimation of the Spanish yield fitted the data and reproduced the stylized facts well. To examine the dynamic of yield via impulse response function, I found the improvement of budget balance leads to a transitory significant response of yield curve level and slope.


“Tests of Technical Trading Profitability in Australian Financial Markets”