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Spillover Effects on Government Bond Yields in Euro Zone. Does Full Financial Integration Exist in European Government Bond Markets?

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Balli, Faruk

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Abstract

This paper examines the time varying nature of European government bond market integration by employing multivariate GARCH models. We state that unlike other bond markets, in euro markets the default(credit) risk factor and other macroeconomic and fiscal indicators are not able to explain the sovereign bond yields after the beginning of monetary union. This fact might be counted as a signal for perfect financial integration. However, we also find that the global shocks affect Germany and the rest of euro bond markets in various levels, creating particular discrepancies in asset prices even we take into account the market specific factors. Different level responses of each euro market to the global shocks reveal that euro bond markets are not fully integrated with each other unlike the recent literature claimed. Besides, we explore that the global factors are effective for the volatility of yield differentials among euro government bonds.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10162.

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Date of creation: May 2008
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Handle: RePEc:pra:mprapa:10162

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Related research
Keywords: Financial Integration; Multivariate GARCH models. Euro Bond Markets; Spillover Effects; Asset Pricing.;

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Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  4. Carlo Favero & Marco Pagano & Ernst-Ludwig von Thadden, 2005. "Valutation, Liquidity and Risk in Government Bond Markets," Working Papers 281, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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    Other versions:
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  15. Kim, Suk-Joong & Moshirian, Fariborz & Wu, Eliza, 2006. "Evolution of international stock and bond market integration: Influence of the European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1507-1534, May. [Downloadable!] (restricted)
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