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Measuring Financial Fragmentation in the Euro Area Corporate Bond Market

Author

Listed:
  • Guillaume Horny

    () (DGEI, Banque de France, 75001 Paris, France)

  • Simone Manganelli

    () (DG-Research, European Central Bank, Financial Research, 60314 Frankfurt am Main, Germany)

  • Benoit Mojon

    () (Monetary and Economic Department, Bank for International Settlements, 4002 Basel, Switzerland)

Abstract

This paper analyses the determinants of euro area non-financial corporate bonds since the early 2000s, so as to gauge deviations from the law of one price. We decompose the spread between the yield of German, French, Italian and Spanish corporate bonds vis-à-vis the German Bund of similar maturity into country, credit and duration risk premia components via dummy regressions. We highlight three main findings. First, the initial phase of the financial crisis (2008–2009) caused an overall increase in credit risk premia. Since the beginning of 2013 credit risk premia are back to levels comparable to those preceding the financial crisis. Second, at the height of the euro area sovereign crisis (2011–2012), high credit risk premia were accompanied by strong and persistent signs of market fragmentation in Italy and Spain (but not in France). This fragmentation has reached its peak in the second half of 2012 and has started to recede only after the announcement of the OMT. Third, we provide a simple measure of financial integration across the big 4 member states of the euro area.

Suggested Citation

  • Guillaume Horny & Simone Manganelli & Benoit Mojon, 2018. "Measuring Financial Fragmentation in the Euro Area Corporate Bond Market," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(4), pages 1-19, October.
  • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:74-:d:178985
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    Cited by:

    1. Zaghini, Andrea, 2016. "Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?," Journal of Financial Stability, Elsevier, vol. 23(C), pages 51-61.
    2. Silvia Gabrieli & Claire Labonne, 2018. "Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015," Supervisory Research and Analysis Working Papers RPA 18-3, Federal Reserve Bank of Boston.
    3. De Santis, Roberto A., 2018. "Unobservable country bond premia and fragmentation," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 1-25.
    4. Lucey, Brian M. & Vigne, Samuel A. & Ballester, Laura & Barbopoulos, Leonidas & Brzeszczynski, Janusz & Carchano, Oscar & Dimic, Nebojsa & Fernandez, Viviana & Gogolin, Fabian & González-Urteaga, Ana , 2018. "Future directions in international financial integration research - A crowdsourced perspective," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 35-49.
    5. De Santis, Roberto A., 2016. "Credit spreads, economic activity and fragmentation," Working Paper Series 1930, European Central Bank.
    6. Zaghini, Andrea, 2017. "A tale of fragmentation: Corporate funding in the euro-area bond market," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 59-68.
    7. Xing (Alex) Zhou, 2020. "Corporate Debt," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 13(9), pages 1-2, September.
    8. Serati, Massimiliano & Venegoni, Andrea, 2019. "The cross-country impact of ECB policies: Asymmetries in – Asymmetries out?," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 118-141.
    9. Garbinti, Bertrand & Lamarche, Pierre & Savignac, Frédérique & Lecanu, Charlélie, 2020. "Wealth effect on consumption during the sovereign debt crisis: households heterogeneity in the euro area," Working Paper Series 2357, European Central Bank.
    10. Stijn Claessens, 2019. "Fragmentation in global financial markets: good or bad for financial stability?," BIS Working Papers 815, Bank for International Settlements.
    11. F. Koulischer, 2015. "Asymmetric shocks in a currency union: The role of central bank collateral policy," Working papers 554, Banque de France.
    12. Dimitrios Anastasiou & Helen Louri & Mike Tsionas, 2019. "Nonperforming loans in the euro area: Are core–periphery banking markets fragmented?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 97-112, January.
    13. Zaghini, Andrea, 2019. "The CSPP at work: Yield heterogeneity and the portfolio rebalancing channel," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 282-297.
    14. Joost Bats, 2020. "Corporates' dependence on banks: The impact of ECB corporate sector purchases," DNB Working Papers 667, Netherlands Central Bank, Research Department.
    15. Horny, G. & Manganelli, S. & Mojon, B., 2016. "Changes in financial fragmentation in the euro area since 2008," Rue de la Banque, Banque de France, issue 28, july..

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    More about this item

    Keywords

    financial integration; credit risk; country premia; fragmentation index;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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