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Sovereign Bond Yield Spillovers in the Euro Zone During the Financial and Debt Crisis

  • Antonakakis, Nikolaos
  • Vergos, Konstantinos

In this paper we examine the linkages of government bond yield spreads (BYS) between Euro zone countries over the period March 3, 2007 - June 18, 2012, thus considering the intriguing features of BYS spillovers during the global financial and the Euro zone debt crisis. Splitting our sample to Euro zone periphery and core countries, and using the VAR-based spillover index approach of Diebold and Yilmaz (2012), we find that: (i) on average, BYS shocks tend to increase future BYS, and are related to news announcements and policy changes; (ii) BYS spillovers between Euro zone countries are highly intertwined, originating mostly from the periphery (Greece, Ireland, Italy, Portugal and Spain (GIIPS)) and to a lesser extent from the core (Austria, Belgium, France and Netherlands (ABFN)). The within-effect of BYS spillovers is of greater magnitude within the periphery than that within the core; iv) The between-effect (core vs periphery) of BYS spillovers suggests directional spillovers of greater magnitude from the periphery to the Euro zone core than vice-versa. Generalized impulse response analyses provide additional support to these findings. Our findings highlight the increased vulnerability of Euro zone from the destabilizing shocks originating from the beleaguered Euro zone countries in the periphery.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43284.

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Date of creation: 15 Dec 2012
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Handle: RePEc:pra:mprapa:43284
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  1. Francis X. Diebold & Kamil Yilmaz, 2010. "Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers," Koç University-TUSIAD Economic Research Forum Working Papers 1001, Koc University-TUSIAD Economic Research Forum, revised Mar 2010.
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  8. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Working Paper Series 1625, European Central Bank.
  9. Faruk Balli, 2009. "Spillover effects on government bond yields in euro zone. Does full financial integration exist in European government bond markets?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(4), pages 331-363, October.
  10. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
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  12. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  13. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
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  15. Peter Claeys & Borek Vašícek, 2012. "“Measuring Sovereign Bond Spillover in Europe and the Impact of Rating News”," AQR Working Papers 201209, University of Barcelona, Regional Quantitative Analysis Group, revised Nov 2012.
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  17. António Afonso, 2009. "Long-term Government Bond Yields and Economic Forecasts: Evidence for the EU," Working Papers Department of Economics 2009/38, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  18. Guglielmo Maria Caporale & Alessandro Girardi, 2011. "Fiscal Spillovers in the Euro Area," Discussion Papers of DIW Berlin 1164, DIW Berlin, German Institute for Economic Research.
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  21. Bertrand Candelon & Amadou N. R. Sy & Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers; Evidence from the European Debt Crisis," IMF Working Papers 11/68, International Monetary Fund.
  22. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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  24. Charlotte Christiansen, 2007. "Volatility-Spillover Effects in European Bond Markets," European Financial Management, European Financial Management Association, vol. 13(5), pages 923-948.
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