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Dynamic Correlations of Sovereign Bond Yield Spreads in the Euro zone and the Role of Credit Rating Agencies' Downgrades

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  • Antonakakis, Nikolaos

Abstract

The European debt crisis that followed the global financial crisis, erupting first with Greece, then Ireland, Portugal, Italy and Spain, has threatened the very existence of the Euro zone. In this paper we examine the evolution of dynamic co-movements of sovereign bond yield spreads (BYS) in the Euro zone and the role of credit rating agency downgrades on those co-movements. Estimation results from a multivariate DCC-GARCH model on daily BYS data for nine Euro zone countries over the period 2007-2012 suggest an inverted U-shaped curve of BYS co-movements during the period of the financial and debt crisis. Credit rating downgrades by major rating agencies indicate rather idiosyncratic patterns of government bond yield spreads co-movements within and between the Euro zone periphery and the core.

Suggested Citation

  • Antonakakis, Nikolaos, 2012. "Dynamic Correlations of Sovereign Bond Yield Spreads in the Euro zone and the Role of Credit Rating Agencies' Downgrades," MPRA Paper 43013, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:43013
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    File URL: https://mpra.ub.uni-muenchen.de/43013/1/MPRA_paper_43013.pdf
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    References listed on IDEAS

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    1. Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," World Bank Economic Review, World Bank Group, vol. 16(2), pages 171-195, August.
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    7. Paula Hill & Robert Faff, 2010. "The Market Impact of Relative Agency Activity in the Sovereign Ratings Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9-10), pages 1309-1347, November/.
    8. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
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    Cited by:

    1. Blot, Christophe & Creel, Jérôme & Hubert, Paul & Labondance, Fabien & Saraceno, Francesco, 2015. "Assessing the link between price and financial stability," Journal of Financial Stability, Elsevier, vol. 16(C), pages 71-88.
    2. Lukmanova, Elizaveta & Tondl, Gabriele, 2016. "Macroeconomic Imbalances and Business Cycle Synchronization. Why Common Economic Governance is Imperative for the Eurozone," Department of Economics Working Paper Series 5087, WU Vienna University of Economics and Business.
    3. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4oqi4ibn is not listed on IDEAS
    4. Lukmanova, Elizaveta & Tondl, Gabriele, 2017. "Macroeconomic imbalances and business cycle synchronization. Why common economic governance is imperative for the Eurozone," Economic Modelling, Elsevier, vol. 62(C), pages 130-144.
    5. Filip Smolik & Lukas Vacha, 2015. "Time-scale analysis of co-movement in EU sovereign bond markets," Papers 1506.03347, arXiv.org, revised Mar 2016.
    6. Silvapulle, Param & Fenech, Jean Pierre & Thomas, Alice & Brooks, Rob, 2016. "Determinants of sovereign bond yield spreads and contagion in the peripheral EU countries," Economic Modelling, Elsevier, vol. 58(C), pages 83-92.
    7. repec:spo:wpmain:info:hdl:2441/114p6m6s0395gqm0es4g7kgv3u is not listed on IDEAS
    8. Elizaveta Lukmanova & Gabriele Tondl, 2016. "Macroeconomic Imbalances and Business Cycle Synchronization. Why Common Economic Governance is Imperative for the Eurozone," Department of Economics Working Papers wuwp229, Vienna University of Economics and Business, Department of Economics.
    9. Smolik, Filip & Vacha, Lukas, 2015. "Time-scale analysis of sovereign bonds market co-movement in the EU," FinMaP-Working Papers 44, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.

    More about this item

    Keywords

    Government bond yield spreads; credit rating agencies; dynamic conditional correlations; Euro zone sovereign debt crisis;

    JEL classification:

    • 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
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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