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Is there a Long-Term Relationship among European Sovereign Bond Yields?

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  • Ian Schaeffer
  • Miguel D. Ramirez

Abstract

The integration of financial markets has been a recurring theme in academic and financial research. The majority of the literature has focused on equity markets. Literature on the integration of international bond markets is not as common, specifically regarding that of European bonds since the beginning of the common currency area in 1999. This paper estimates a fixed effects pooled model and then proceeds to undertake panel unit root and cointegration tests to determine the degree of co-movement of European sovereign bond yields. The reported estimates suggest that yields move together over time, thus the benefits of diversification in European government bond portfolios may be limited. The results also have important implications for monetary policy. Given that economic shocks (e.g. inflationary shocks) are transmitted quickly from country to country, then it will complicate the task of monetary policy when it comes to pursuing an independent policy with respect to domestic monetary conditions in the presence of asymmetric economic shocks.

Suggested Citation

  • Ian Schaeffer & Miguel D. Ramirez, 2017. "Is there a Long-Term Relationship among European Sovereign Bond Yields?," Business and Economic Research, Macrothink Institute, vol. 7(1), pages 68-86, June.
    • Handle: RePEc:mth:ber888:v:7:y:2017:i:1:p:68-86
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    More about this item

    Keywords

    European Monetary Union; Fully modified ordinary least squares (FMOLS); Pairwise Granger Causality tests; Panel unit roots; Panel cointegration; Sovereign bond yields;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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