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Measuring Financial Fragmentation in the Euro Area Corporate Bond Market

Author

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  • 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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gabrieli, Silvia & Labonne, Claire, 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.
    2. repec:eee:jimfin:v:82:y:2018:i:c:p:1-25 is not listed on IDEAS
    3. repec:eee:finana:v:55:y:2018:i:c:p:35-49 is not listed on IDEAS
    4. De Santis, Roberto A., 2016. "Credit spreads, economic activity and fragmentation," Working Paper Series 1930, European Central Bank.
    5. repec:eee:jimfin:v:90:y:2019:i:c:p:118-141 is not listed on IDEAS
    6. F. Koulischer, 2015. "Asymmetric shocks in a currency union: The role of central bank collateral policy," Working papers 554, Banque de France.
    7. repec:wly:ijfiec:v:24:y:2019:i:1:p:97-112 is not listed on IDEAS
    8. 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.
    9. 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.
    10. 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.
    11. 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..

    More about this item

    Keywords

    financial integration; credit risk; country premia; fragmentation index;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • E - Macroeconomics and Monetary Economics
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • G - Financial Economics

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