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Integration and Disintegration of EMU Government Bond Markets

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  • Leschinski, Christian
  • Voges, Michelle
  • Sibbertsen, Philipp

Abstract

This paper analyzes market integration among long term government bonds in the Eurozone since the inception of the Euro in 1999. While it is commonly assumed that markets for EMU government bonds were closely integrated prior to the EMU debt crisis, we find that there is significant time variation in their relationship. There are periods of integration and disintegration, and differences between core and periphery countries can be observed long before the EMU debt crisis. To obtain insights into the sources of the observed time variation, we analyze the dependence on variables related to market sentiment, risk and risk aversion. The drivers of market integration are found to be similar to those for the well documented flight-to-quality effects from stocks to bonds, suggesting that in times of crisis investors do not only shift their portfolios from stocks to bonds, but there is also a stronger differentiation between more and less risky bonds. The persistence of these differentials leads to the conclusion that (at least in times of crisis) the pricing of EMU government bonds implied the possibility of macroeconomic and fiscal divergence between the EMU countries.

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  • Leschinski, Christian & Voges, Michelle & Sibbertsen, Philipp, 2018. "Integration and Disintegration of EMU Government Bond Markets," Hannover Economic Papers (HEP) dp-625, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  • Handle: RePEc:han:dpaper:dp-625
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    Cited by:

    1. Paulo M.M. Rodrigues & Philipp Sibbertsen & Michelle Voges, 2019. "Testing for breaks in the cointegrating relationship: On the stability of government bond markets’ equilibrium," Working Papers w201912, Banco de Portugal, Economics and Research Department.
    2. Dräger, Lena & Kolaiti, Theoplasti & Sibbertsen, Philipp, 2020. "Measuring Macroeconomic Convergence and Divergence within EMU Using Long Memory," Hannover Economic Papers (HEP) dp-675, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Feb 2021.

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    More about this item

    Keywords

    EMU Debt Crisis; Flight-to-quality; Fractional Cointegration; Market Integration; Yield Spreads;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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