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Dynamic Correlations of Sovereign Bond Yield Spreads in the Euro zone and the Role of Credit Rating Agencies' Downgrades

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  • Antonakakis, Nikolaos

Abstract

The European debt crisis that followed the global financial crisis, erupting first with Greece, then Ireland, Portugal, Italy and Spain, has threatened the very existence of the Euro zone. In this paper we examine the evolution of dynamic co-movements of sovereign bond yield spreads (BYS) in the Euro zone and the role of credit rating agency downgrades on those co-movements. Estimation results from a multivariate DCC-GARCH model on daily BYS data for nine Euro zone countries over the period 2007-2012 suggest an inverted U-shaped curve of BYS co-movements during the period of the financial and debt crisis. Credit rating downgrades by major rating agencies indicate rather idiosyncratic patterns of government bond yield spreads co-movements within and between the Euro zone periphery and the core.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43013.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:43013

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Keywords: Government bond yield spreads; credit rating agencies; dynamic conditional correlations; Euro zone sovereign debt crisis;

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  1. Gilmore, Claire G. & Lucey, Brian M. & Boscia, Marian W., 2010. "Comovements in government bond markets: A minimum spanning tree analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4875-4886.
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  3. Afonso, António & Furceri, Davide & Gomes, Pedro, 2012. "Sovereign credit ratings and financial markets linkages: Application to European data," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 606-638.
  4. Alsakka, Rasha & ap Gwilym, Owain, 2013. "Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 144-162.
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  7. Sy, Amadou N.R., 2004. "Rating the rating agencies: Anticipating currency crises or debt crises?," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2845-2867, November.
  8. Boysen-Hogrefe, Jens, 2013. "A dynamic factor model with time-varying loadings for euro area bond markets during the debt crisis," Economics Letters, Elsevier, vol. 118(1), pages 50-54.
  9. Paula Hill & Robert Faff, 2010. "The Market Impact of Relative Agency Activity in the Sovereign Ratings Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9-10), pages 1309-1347, November/.
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Cited by:
  1. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance & Francesco Saraceno, 2014. "Assessing the link between price and financial stability," Documents de Travail de l'OFCE 2014-02, Observatoire Francais des Conjonctures Economiques (OFCE).
  2. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4oqi4ibn is not listed on IDEAS

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