A Euro Area Term Structure Model with Time Varying Exposures

Using monthly data for Belgium, France, Germany, Italy and Spain for the period 2002-2019, we build a Hierarchical Euro Area Dynamic Nelson-Siegel model that allows for time varying exposures of national factors on the common components, and for stochastic volatility both at the regional and country specific level. Despite the share of national variance explained by the Euro Area factors is generally dominant, our results point out a dramatic decrease of the relative importance of common forces during the 2008 and 2012 crises, which created a neat separation between “core” and “peripheral” countries. This gap is particularly visible in the term premia demanded by investors on long term sovereign bonds. Furthermore, in line with Byrne et al. (2019), we find that both the level of interest rates and the associated term premia are closely related to confidence and uncertainty measures. In the aftermath of the crises these relationships appear weakened, presumably due to unconventional interventions of the ECB