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Government bond market integration and the EMU: Correlation based evidence

  • Sebastian Missio
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    In July 1990, the project of the European Monetary Union (EMU) started and finally led to the introduction of the Euro in January 1999. This paper analyses the development of the government bond market integration during the three stages of the EMU. Based on the results from dynamic conditional correlation (DCC) models, the study shows that the integration process was highly advanced but not completed at any point in time and that the degree of integration differentiated between geographical and political regions. It is confirmed statistically that the first, the second and the third stage of the EMU each contributed as a whole to the integration process and that each beginning of a new stage triggered an own wave of government bond market integration progress. Finally, a comparison of government bond market integration with equity market integration is proposed in order to identify the particular reason for the bond market integration in Europe. The results demonstrate that the expectation of real harmonization of fundamental values as opposed to an expectation that countries of the Euro Area will be saved once there is financial distress drives the European government bond market integration.

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    File URL: http://www.bgpe.de/texte/DP/125_Missio.pdf
    File Function: First version, 2012
    Download Restriction: no

    Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 125.

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    Length: 29 pages
    Date of creation: Sep 2012
    Handle: RePEc:bav:wpaper:125_missio
    Contact details of provider: Web page: http://www.bgpe.de/

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    1. Marco Pagano & Ernst-Ludwig von Thadden, 2004. "The European Bond Markets under EMU," CSEF Working Papers 126, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government risk premiums in the bond market: EMU and Canada," European Journal of Political Economy, Elsevier, vol. 25(3), pages 371-384, September.
    3. Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc.
    4. Cappiello, Lorenzo & Gérard, Bruno & Kadareja, Arjan & Manganelli, Simone, 2006. "Financial integration of new EU Member States," Working Paper Series 0683, European Central Bank.
    5. R. Jankowitsch & H. Mosenbacher & S. Pichler, 2006. "Measuring the liquidity impact on EMU government bond prices," The European Journal of Finance, Taylor & Francis Journals, vol. 12(2), pages 153-169.
    6. Roberto Rigobon, 2002. "Contagion: How to Measure It?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 269-334 National Bureau of Economic Research, Inc.
    7. Abad, Pilar & Chuliá, Helena & Gómez-Puig, Marta, 2010. "EMU and European government bond market integration," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2851-2860, December.
    8. Favero, Carlo A. & Pagano, Marco & von Thadden, Ernst-Ludwig, 2008. "How Does Liquidity Affect Government Bond Yields?," CEPR Discussion Papers 6649, C.E.P.R. Discussion Papers.
    9. Ehrmann, Michael & Fratzscher, Marcel & Gürkaynak, Refet S. & Swanson, Eric, 2007. "Convergence and anchoring of yield curves in the euro area," Working Paper Series 0817, European Central Bank.
    10. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
    11. Kpate ADJAOUTÉ & Jean-Pierre DANTHINE, 2003. "European Financial Integration and Equity Returns: A Theory-Based Assessment," FAME Research Paper Series rp84, International Center for Financial Asset Management and Engineering.
    12. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    13. Denise Côté & Christopher Graham, 2004. "Convergence of Government Bond Yields in the Euro Zone: The Role of Policy Harmonization," Staff Working Papers 04-23, Bank of Canada.
    14. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004. "Sovereign risk premia in the European government bond market," Working Paper Series 0369, European Central Bank.
    15. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 191-240, 04.
    16. Cappiello, Lorenzo & Hördahl, Peter & Kadareja, Arjan & Manganelli, Simone, 2006. "The impact of the euro on financial markets," Working Paper Series 0598, European Central Bank.
    17. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    18. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
    19. Edwards, Sebastian & Rigobon, Roberto, 2002. "Currency crises and contagion: an introduction," Journal of Development Economics, Elsevier, vol. 69(2), pages 307-313, December.
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