Euro Area Government Bonds?Integration and Fragmentation During the Sovereign Debt Crisis

Michael Ehrmann and Marcel Fratzscher

No 10583, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantial fragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank?s (ECB?s) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. While this suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement, the high current degree of fragmentation poses difficult challenges for policy-makers, since it leads to an unequal transmission of the ECB?s monetary policy to the various countries.

Keywords: Contagion; Ecb; European crisis; Fragmentation; High-frequency data; Identification; Integration; Policy; Sovereign debt (search for similar items in EconPapers)
JEL-codes: E5 F3 G15 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
https://cepr.org/publications/DP10583 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis (2015)
Working Paper: Euro Area Government Bonds: Integration and Fragmentation during the Sovereign Debt Crisis (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10583

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10583

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().