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European Sovereign Bond and Stock Market Granger Causality Dynamics

Author

Listed:
  • Gomes, Pedro

    (Birkbeck, University of London)

  • Kurter, Zeynep O.

    (University of Warwick)

  • Morita, Rubens

    (Birkbeck, University of London)

Abstract

We investigate the lead-lag relationship between weekly sovereign bond yield changes and stock market returns for eight European countries, and how it changed during the period 2008-2018. We use a Markov-Switching Granger Causality method that determines reversals of causality endogenously. In all countries, there were often changes in the direction of the Granger causality between the two markets that coincided with global and idiosyncratic economic events. Stock returns led changes of sovereign bond yields in all countries, particularly during the financial and the Euro Area crisis. Changes of sovereign bond yields occasionally led stock returns in France, Spain and Portugal. JEL classification: C32 ; C54 ; C61 ; G01 ; G12 ; G15

Suggested Citation

  • Gomes, Pedro & Kurter, Zeynep O. & Morita, Rubens, 2022. "European Sovereign Bond and Stock Market Granger Causality Dynamics," The Warwick Economics Research Paper Series (TWERPS) 1405, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1405
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2022/twerp_1405_-_kurter.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Sovereign Bond Yields ; Stock Markets ; Vector Autoregression ; Markov-Switching ; Granger Causality;
    All these keywords.

    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
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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