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Correlation and volatility on bond markets during the EMU crisis: does the OMT change the process ?

Author

Listed:
  • Franck Martin

    () (University of Rennes 1 and Crem)

  • Jiangxingyun Zhang

    () (University of Rennes 1 and Crem)

Abstract

This article studies the correlation and volatility transmission between the European sovereign debt markets during the period of 2008-2013. By applying a multivariate GARCH model and a flight-to-quality test, the empirical results support not only the existence of flight-to-quality from the periphery countries (Italy, Portugal, Spain, Ireland and Greece) to the pivot countries (France and Germany), but also the flight within each group. This can be explained by a new phenomenon of speculation in bond markets which didn't exist before the debt crisis. However, the estimations bring little evidence that allow us to generalize it to all markets. It seems that in terms of volatility, the pivot countries are relatively difficult to be influenced by the external turbulence. Although we prefer to believe that Europe has walked out of the sovereign debt crisis after the Outright Monetary Transaction (OMT) plan, this study doesn't bring much support for this point of view.

Suggested Citation

  • Franck Martin & Jiangxingyun Zhang, 2014. "Correlation and volatility on bond markets during the EMU crisis: does the OMT change the process ?," Economics Bulletin, AccessEcon, vol. 34(2), pages 1327-1349.
  • Handle: RePEc:ebl:ecbull:eb-14-00505
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    References listed on IDEAS

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    2. FrancisX. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
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    5. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
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    Cited by:

    1. Martin, Franck & Zhang, Jiangxingyun, 2017. "Modelling European sovereign bond yields with international portfolio effects," Economic Modelling, Elsevier, vol. 64(C), pages 178-200.
    2. Franck Martin, 2016. "La structure des taux revisitée pour période de crise: entre contagion, flight to quality et Quantitative Easing," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2016-06, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    3. Kavita Sirichand & Simeon Coleman, 2015. "International yield curve comovements: impact of the recent financial crisis," Applied Economics, Taylor & Francis Journals, vol. 47(43), pages 4561-4573, September.

    More about this item

    Keywords

    EMU debt crisis; bond markets; OMT; Draghi Put; multivariate GARCH model; flight to quality; speculation;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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