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EMU and European Government Bond Market Integration

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Author Info
Pilar Abad () (Fundamentos del Análisis Económico, Paseo Artilleros, E-28032 Madrid, Spain.)
Helena Chuliá () (Universitat Oberta de Catalunya, E-08035 Barcelona, Spain.)
Marta Gomez-Puig () (University of Barcelona, Av. Diagonal 690, E-08034 Barcelona, Spain.)

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Abstract

The main objective of this paper is to study whether the introduction of the euro had an impact on the degree of integration of European Government bond markets. We adopt the CAPM-based model of Bekaert and Harvey (1995) to compare, from the beginning of Monetary Union until June 2008, the differences in the relative importance of two sources of systemic risk (world and Eurozone risk) on Government bond returns, in the two groups of countries (EMU and non-EMU) in EU-15. Our empirical evidence suggests that the impact of the introduction of the euro on the degree of integration of European Government bond markets was important. The markets of the countries that share a monetary policy are less vulnerable to the influence of world risk factors, and more vulnerable to EMU risk factors. However, euro markets are only partially integrated, since they are still segmented and present differences in market liquidity or default risk. For their part, the countries that decided to stay out of the Monetary Union present a higher vulnerability to external risk factors. JEL Classification: E44, F36, G15.

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Paper provided by European Central Bank in its series Working Paper Series with number 1079.

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Length: 33 pages
Date of creation: Aug 2009
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Handle: RePEc:ecb:ecbwps:20091079

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Keywords: Monetary integration; sovereign securities markets; bond markets integration.;

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