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European sovereign bond spreads: monetary unification, market conditions and financial integration

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  • Dimitris A. Georgoutsos

    (Athens University of Economics & Business)

  • Petros Migiakis

    (Bank of Greece)

Abstract

In this paper we examine the dynamics of European sovereign bond yield spreads focusing on issues related to financial integration and market conditions. The finding of near-unit-root effects highlights the need for careful econometric specification. Thus we formulate sovereign bond yield spreads, for eleven EMU countries against the Bund for the period 1992:1-2009:12, as AR(1) processes, while allowing for regime switching effects, along the lines of a Markovian probabilistic specification. Specifically, by taking into account regime switching effects we examine, rather than assume, that monetary unification affected sovereign bond yield spreads, allowing for states of higher and lower interactions to be revealed. Next, we examine the effects of several exogenous explanatory variables. Our results indicate that European sovereign bonds achieved only partial integration even before the recent financial crisis, while financial integration and financial stability are found to be interconnected. Specifically, we find evidence of different effects exercised by the same deterministic factors on sovereign bond yield spreads even before the recent crisis. Additionally, it appears that a negative relation exists between low-volatility conditions and the magnitude of effects exercised by idiosyncratic risk factors on bond yield spreads.

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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 115.

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Length: 38
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:bog:wpaper:115

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Keywords: financial integration; sovereign bond spreads; near unit root; regime shifts;

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References

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Citations

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Cited by:
  1. 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.
  2. Heather D. Gibson & Stephan G. Hall & George S. Tavlas, 2011. "The Greek financial crisis: growing imbalances and sovereign spreads," Working Papers, Bank of Greece 124, Bank of Greece.
  3. Maria Abascal & Tatiana Alonso & Sergio Mayordomo, 2013. "Fragmentation in European Financial Markets: Measures, Determinants, and Policy Solutions," Working Papers, BBVA Bank, Economic Research Department 1322, BBVA Bank, Economic Research Department.
  4. Agnieszka Szczypińska, 2012. "Does the halo effect still hold? Implications for the euro-candidates from the analysis of the EA bond market - the crisis perspective," Working Papers, Ministry of Finance in Poland 15, Ministry of Finance in Poland.

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