Government bond market dynamics and sovereign risk: systemic or idiosyncratic?
AbstractThis paper investigates the comovement of long-term government bond yields in the Eurozone. Themethods used for identifying common trends and common cycles are cointegration and SCCF (serialcorrelation common feature). These low and high frequency comovement analyses based on asymptoticcritical values fail to identify the almost perfect convergence of 10 year sovereign bond yields.After adjusting for heteroscedasticity we fi nd strong evidence for similar cyclical movements anda reduced number of "common cycles" for two separate groups (core and periphery). This confi rmsthe hypothesis that in the European EMU (Economic and Monetary Union) the perceived risk of memberstates has converged. Based on the explanatory power of common and idiosyncratic components, weobserve that sovereign yields are mainly driven by common risk factors and to a reduced degree bycountry specifi c characteristics. We investigate wether our results are a ffected by the recentsovereign debt crisis. With some notable exceptions, we find only small declines in theexplanatory power of the common component. In line with recent literature on increased generalrisk aversion during times of stress, some policy implications for the common currency area areformulated.
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Date of creation: 2012
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