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Financial indicators signalling correlation changes in sovereign bond markets

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  • De Santis, Roberto A.
  • Stein, Michael

Abstract

We use a Smooth Transition Conditional Correlation GARCH (STCC-GARCH) model applied to the euro area monetary policy rates and sovereign yields of Italy, Spain and Germany at 5-year maturity to estimate the threshold level of the signals above which the sovereign bond market moves to a crisis regime. We show that the threshold to a crisis regime for Italy and Spain is reached when (i) their 5-year sovereign yield spreads amount to 80-90 basis points; (ii) their 5-year CDS spreads amount to 120-130 basis points or (iii) the 5-year spread between the Kreditanstalt f JEL Classification: G12, G15, F36

Suggested Citation

  • De Santis, Roberto A. & Stein, Michael, 2014. "Financial indicators signalling correlation changes in sovereign bond markets," Working Paper Series 1746, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20141746
    Note: 185689
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    Cited by:

    1. Caporin, Massimiliano & Pelizzon, Loriana & Ravazzolo, Francesco & Rigobon, Roberto, 2018. "Measuring sovereign contagion in Europe," Journal of Financial Stability, Elsevier, vol. 34(C), pages 150-181.
    2. De Santis, Roberto A., 2015. "A measure of redenomination risk," Working Paper Series 1785, European Central Bank.
    3. De Santis, Roberto A. & Stein, Michael, 2016. "Correlation changes between the risk-free rate and sovereign yields of euro area countries," Working Paper Series 1979, European Central Bank.
    4. Franck Martin & Jiangxingyun Zhang, 2020. "La structure des taux revisitée pour période de crise : entre contagion, flight to quality et quantitative easing," Revue économique, Presses de Sciences-Po, vol. 71(4), pages 623-665.
    5. van Wijnbergen, Sweder & Olijslagers, Stan & de Vette, Nander, 2020. "Debt sustainability when r - g," CEPR Discussion Papers 15478, C.E.P.R. Discussion Papers.
    6. Roberto A. De Santis, 2019. "Redenomination Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2173-2206, December.
    7. Susana Martins & Cristina Amado, 2018. "Financial Market Contagion and the Sovereign Debt Crisis: A Smooth Transition Approach," NIPE Working Papers 08/2018, NIPE - Universidade do Minho.
    8. Campos-Martins, Susana & Amado, Cristina, 2022. "Financial market linkages and the sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 123(C).
    9. Sweder van Wijnbergen & Stan Olijslagers & Nander de Vette, 2020. "Debt sustainability when r - g smaller than 0: no free lunch after all," Tinbergen Institute Discussion Papers 20-079/VI, Tinbergen Institute.

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    More about this item

    Keywords

    correlation breakdowns; government bonds; monetary policy; multivariate GARCH; regime changes;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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