European sovereign bond spreads: monetary unification, market conditions and financial integration

Dimitris Georgoutsos and Petros Migiakis

No 115, Working Papers from Bank of Greece

Abstract: In this paper we examine the dynamics of European sovereign bond yield spreads focusing on issues related to financial integration and market conditions. The finding of near-unit-root effects highlights the need for careful econometric specification. Thus we formulate sovereign bond yield spreads, for eleven EMU countries against the Bund for the period 1992:1-2009:12, as AR(1) processes, while allowing for regime switching effects, along the lines of a Markovian probabilistic specification. Specifically, by taking into account regime switching effects we examine, rather than assume, that monetary unification affected sovereign bond yield spreads, allowing for states of higher and lower interactions to be revealed. Next, we examine the effects of several exogenous explanatory variables. Our results indicate that European sovereign bonds achieved only partial integration even before the recent financial crisis, while financial integration and financial stability are found to be interconnected. Specifically, we find evidence of different effects exercised by the same deterministic factors on sovereign bond yield spreads even before the recent crisis. Additionally, it appears that a negative relation exists between low-volatility conditions and the magnitude of effects exercised by idiosyncratic risk factors on bond yield spreads.

Keywords: financial integration; sovereign bond spreads; near unit root; regime shifts (search for similar items in EconPapers)
JEL-codes: F21 F36 G12 G32 (search for similar items in EconPapers)
Pages: 38
Date: 2010-06
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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