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Benchmark bonds interactions under regime shifts

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  • Dimitris A. Georgoutsos

    (Athens University of Economics & Business)

  • Petros M. Migiakis

    ()
    (Bank of Greece)

Abstract

In the present paper we examine interactions among five benchmark ten year government bonds, namely those of the US, Germany, France, Italy and the Netherlands. Our aim is to illustrate empirically a network of interactions existing among the major bond markets of Europe and the US market taking into account shifts in the underlying stochastic processes. For this purpose, and in contrast to the rest of the relevant empirical literature, after specifying the long-run equilibrium relations we estimate the linkages between the bond markets as subject to hidden Markov chains, by applying the Markov Switching Vector Error Correction framework (MS-VECM). This formulation is found to efficiently reflect the shifts brought about by significant economic events, such as the European monetary unification. As a result we illustrate different short-run relations referring to the periods before and after monetary union. Overall, our empirical results indicate that stronger interactions between the markets of the system exist in the period after the EMU. Also, by means of a variance decomposition analysis we assess leader-follower relations which indicate that the benchmark status of bonds has changed since the introduction of the common monetary policy framework in Europe.

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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 103.

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Length: 36 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:bog:wpaper:103

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Keywords: Financial integration; bond markets; benchmarks; Markov Switching;

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Citations

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Cited by:
  1. Dimitris A. Georgoutsos & Petros Migiakis, 2010. "European sovereign bond spreads: monetary unification, market conditions and financial integration," Working Papers, Bank of Greece 115, Bank of Greece.
  2. Vasilis Droucopoulos & Panagiotis Chronis, 2010. "“Assessing market dominance”: a comment and an extension," Working Papers, Bank of Greece 109, Bank of Greece.
  3. Georgoutsos, Dimitris A. & Migiakis, Petros M., 2013. "Heterogeneity of the determinants of euro-area sovereign bond spreads; what does it tell us about financial stability?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4650-4664.
  4. Guglielmo Maria Caporale & Alessandro Girardi, 2011. "Fiscal Spillovers in the Euro Area," CESifo Working Paper Series 3693, CESifo Group Munich.

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