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Causality and Contagion in EMU Sovereign Bonds Revisited: Novel Evidence from Nonlinear Causality Tests

Author

Listed:
  • Vassilios Babalos

    (Department of Banking and Financial Management, University of Piraeus, Greece)

  • Clement Kyei

    (Department of Economics, University of Pretoria)

  • Evangelos I. Poutos

    (Department of Social Sciences, Hellenic Open University, Greece)

Abstract

This paper investigates the possible existence of Granger-causal relationships in the behavior of sovereign bond markets within the European Monetary Union (EMU), with special focus on higher order causality accounting for nonlinear dependence between the variables. With the above in mind both traditional linear and the nonlinear variants of the Granger causality test are conducted. An extensive sample of yields on 10-year sovereign bonds issued by 12 EMU countries and USA over the period running from January 2000 to June of 2014 is employed. Our findings reveal interesting causality patterns both at first and second order moment of sovereign yields. In particular, a bi-directional causality in mean and variance within the group of the southern Europe countries and a weak evidence of causality both in mean and variance running from southern to northern Europe sovereign yields is observed. Our results entail significant policy implications for market regulators and bond portfolio investors and useful insights for researchers interested in the developments of EMU sovereign debt markets.

Suggested Citation

  • Vassilios Babalos & Clement Kyei & Evangelos I. Poutos, 2015. "Causality and Contagion in EMU Sovereign Bonds Revisited: Novel Evidence from Nonlinear Causality Tests," Working Papers 201514, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201514
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    Cited by:

    1. González-Sánchez, Mariano, 2018. "Causality in the EMU sovereign bond markets," Finance Research Letters, Elsevier, vol. 26(C), pages 281-290.

    More about this item

    Keywords

    Sovereign debt; European Monetary Union; Linear causality; Nonlinear causality;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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