A Fragmentation Indicator for Euro Area Sovereign Bond Markets

This Letter presents a simple indicator which can be used to monitor fragmentation in euro area sovereign bond markets. The indicator is a moving average cross-correlation of bond yield log returns between Germany and other euro area countries. We suggest that a lower correlation implies greater market fragmentation. We do not distinguish between fragmentation based on fundamentals and that based on market sentiment, although we expect sentiment to play a key role. We compare the simple indicator to a bivariate dynamic conditional correlation (DCC) GARCH estimate which accounts for heteroskedasticity. The estimates indicate that the core countries decouple from Germany and then re-attach, whereas the peripheral countries remain fragmented during the entire sample period.