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Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis

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  • Michael Ehrmann
  • Marcel Fratzscher

Abstract

The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantial fragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank’s (ECB’s) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. While this suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement, the high current degree of fragmentation poses difficult challenges for policy-makers, since it leads to an unequal transmission of the ECB’s monetary policy to the various countries.

Suggested Citation

  • Michael Ehrmann & Marcel Fratzscher, 2015. "Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis," Staff Working Papers 15-13, Bank of Canada.
  • Handle: RePEc:bca:bocawp:15-13
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    References listed on IDEAS

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    Cited by:

    1. Richhild Moessner, 2018. "Effects of asset purchases and financial stability measures on term premia in the euro area," Applied Economics, Taylor & Francis Journals, vol. 50(43), pages 4617-4631, September.
    2. Francesco Saraceno & Roberto Tamborini, 2015. "How can it work? On the impact of quantitative easing in the Eurozone," DEM Working Papers 2015/03, Department of Economics and Management.
    3. repec:rfa:aefjnl:v:6:y:2019:i:1:p:109-117 is not listed on IDEAS
    4. 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.
    5. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    6. De Santis, Roberto A. & Zimic, Srečko, 2017. "Spillovers among sovereign debt markets: identification by absolute magnitude restrictions," Working Paper Series 2055, European Central Bank.

    More about this item

    Keywords

    Asset pricing; Financial markets; Interest rates; International financial markets;

    JEL classification:

    • F3 - International Economics - - International Finance
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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