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The Anatomy of Government Bond Yields Synchronization in the Eurozone

Author

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  • Claudio Barbieri

    (Université Côte d'Azur, CNRS, GREDEG, France
    Sant'Anna School of Advanced Studies)

  • Mattia Guerini

    (Université Côte d'Azur, CNRS, GREDEG, France
    Sant'Anna School of Advanced Studies
    Sciences Po., OFCE)

  • Mauro Napoletano

    (OFCE Sciences-Po
    SKEMA Business School)

Abstract

We investigate the synchronization of Eurozone’s government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends upon yields maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased signicantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We show the existence of a duality between our empirical results and portfolio theory and we point to divergence trades and fight-to-quality effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monetary policy in the Eurozone.

Suggested Citation

  • Claudio Barbieri & Mattia Guerini & Mauro Napoletano, 2021. "The Anatomy of Government Bond Yields Synchronization in the Eurozone," GREDEG Working Papers 2021-08, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
  • Handle: RePEc:gre:wpaper:2021-08
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    More about this item

    Keywords

    Synchronization; Bond Yields; Factor Models; Random Matrix Theory; Monetary policy;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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