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