Spillover Effects in Government Bond Spreads: Evidence from a GVAR Model

Britta Niehof ()
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Britta Niehof: University of Marburg

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper analyses the main drivers of sovereign bond spreads in a globalised world. Specifically, we account for international spillovers of bond spreads by adding an additional driver, namely, financial markets, and allowing interactions across countries and markets. We contribute to the VAR literature by taking a global VAR approach, which encompasses international linkages and spillovers and also deals with the issue of identifcation and the large dimensionality. We find significant spillovers across countries and across markets. Moreover, we reveal that bond spreads are driven by stock markets. Furthermore, highly indebted countries react more strongely to foreign shocks than do stable economies. European bond markets are primarily driven by European shocks, whereas U.S. shocks have a higher impact on European countries that are in crisis and other non-European OECD countries. Our results demonstrate that financial market participants, central bankers, and fiscal policymakers need to be aware of global interdependencies, as bond spread volatility is driven by different factors for each country.

Keywords: New Keynesian Model; Philipps Curve; Taylor Rule; Stochastic Differential Equations (search for similar items in EconPapers)
JEL-codes: C02 C63 E44 E47 E52 F41 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014
New Economics Papers: this item is included in nep-eec, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201458

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