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Spillover in Euro Area Sovereign Bond Markets

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  • Conefrey, Thomas

    (Central Bank of Ireland)

  • Cronin, David

    (Central Bank of Ireland)

Abstract

This paper applies the Diebold and Yilmaz (2009, 2012) methodology to assess spillovers in euro area sovereign bond markets. Our analysis identifies a number of phases of interaction in those markets in recent years. We find a substantial increase in spillover between euro area sovereign bond markets around the time of the bailout of Bear Stearns in March 2008. The phase of the euro zone crisis from the first Greece bailout in May 2010 until the end of 2011 saw a reversal of the longstanding pattern whereby events in core euro area member state sovereign bond markets exercised a positive net influence on the periphery. In particular, the first Greece bailout coincided with significant positive net spillover from the PIIGS to the core countries. More recently, improved market conditions have seen the pre- 2008 pattern re-established with the core having a stronger net impact on peripheral euro area sovereign bond markets. The analysis points to Greece having become relatively detached from other bond markets since its second bailout in March 2012. The spillover index and its components can be updated on an ongoing basis as new data become available and can provide useful information to policymakers and analysts alike.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 05/RT/13.

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Date of creation: Jul 2013
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Handle: RePEc:cbi:wpaper:05/rt/13

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Related research

Keywords: Spillover index; forecast error variance decomposition; euro area sovereign bond markets; financial stability;

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  1. Francis X. Diebold & Kamil Yilmaz, 2008. "Measuring financial asset return and volatility spillovers, with application to global equity markets," Working Papers 08-16, Federal Reserve Bank of Philadelphia.
  2. Antonakakis, Nikolaos & Vergos, Konstantinos, 2012. "Sovereign Bond Yield Spillovers in the Euro Zone During the Financial and Debt Crisis," MPRA Paper 43284, University Library of Munich, Germany.
  3. Ashoka Mody, 2009. "From Bear Stearns to Anglo Irish," IMF Working Papers 09/108, International Monetary Fund.
  4. Peter Claeys & Borek Vasicek, 2012. "Measuring Sovereign Bond Spillover in Europe and the Impact of Rating News," Working Papers 2012/07, Czech National Bank, Research Department.
  5. Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," CEPR Discussion Papers 8679, C.E.P.R. Discussion Papers.
  6. Paul De Grauwe & Yuemei Ji, 2012. "Mispricing of Sovereign Risk and Macroeconomic Stability in the Eurozone," Journal of Common Market Studies, Wiley Blackwell, vol. 50(6), pages 866-880, November.
  7. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  8. Francis X. Diebold & Kamil Yilmaz, 2010. "Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers," Koç University-TUSIAD Economic Research Forum Working Papers 1001, Koc University-TUSIAD Economic Research Forum, revised Mar 2010.
  9. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  10. Miguel A. Segoviano Basurto & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads," IMF Working Papers 10/120, International Monetary Fund.
  11. Raffaela Giordano & Marcello Pericoli & Pietro Tommasino, 2013. "Pure or wake-up-call contagion? Another look at the EMU sovereign debt crisis," Temi di discussione (Economic working papers) 904, Bank of Italy, Economic Research and International Relations Area.
  12. Ashoka Mody & Damiano Sandri, 2012. "The eurozone crisis: how banks and sovereigns came to be joined at the hip," Economic Policy, CEPR & CES & MSH, vol. 27(70), pages 199-230, 04.
  13. De Grauwe, Paul & Ji, Yuemei, 2013. "Self-fulfilling crises in the Eurozone: An empirical test," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 15-36.
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