European sovereign bond spreads: monetary unification, market conditions and financial integration
AbstractIn 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Greece in its series Working Papers with number 115.
Date of creation: Jun 2010
Date of revision:
financial integration; sovereign bond spreads; near unit root; regime shifts;
Find related papers by JEL classification:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-02 (All new papers)
- NEP-CBA-2010-10-02 (Central Banking)
- NEP-EEC-2010-10-02 (European Economics)
- NEP-IFN-2010-10-02 (International Finance)
- NEP-MON-2010-10-02 (Monetary Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Heather D. Gibson & Stephan G. Hall & George S. Tavlas, 2011.
"The Greek financial crisis: growing imbalances and sovereign spreads,"
124, Bank of Greece.
- Gibson, Heather D. & Hall, Stephen G. & Tavlas, George S., 2012. "The Greek financial crisis: Growing imbalances and sovereign spreads," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 498-516.
- Heather D. Gibson & Stephan G. Hall & George S. Tavlas, 2011. "The Greek financial crisis: growing imbalances and sovereign spreads," Discussion Papers in Economics 11/25, Department of Economics, University of Leicester.
- Maria Abascal & Tatiana Alonso & Sergio Mayordomo, 2013. "Fragmentation in European Financial Markets. Measures, Determinants, and Policy Solutions," Working Papers 1322, BBVA Bank, Economic Research Department.
- 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 15, Ministry of Finance in Poland.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christina Tsochatzi).
If references are entirely missing, you can add them using this form.