CONTAGION AND DIVERGENCE ON SOVEREIGN BOND MARKETS

Piotr Jaworski, Kamil Liberadzki and Marcin Liberadzki ()
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Marcin Liberadzki: University of Warsaw

Copernican Journal of Finance & Accounting, 2017, vol. 6, issue 4, 39-68

Abstract: The paper gives evidence for significant interdependency between sovereign bond yields during pre-crisis period as well as after the recent global debt crisis broke out. These interdependencies can be classified either as contagion or divergence. Both effects should be understood as an increase in interdependency among different assets as a result of a significant shock. Contagion refers to positive interdependency, while the negative correlation illustrates divergence effect. Basing on selected bonds, we found out that divergence effect prevails over contagion. What is more, there has been more divergence among the European Monetary Union (EMU) countries than between the EMU sovereigns and Japanese or the US bonds. Despite the increase of contagion level after the crisis, there was no worldwide retreat from bond markets as a result of global turbulences. While there is a numerous literature on sovereign bond contagion, we propose our methodology for bond divergence effect measuring. The paper organizes and presents main concepts for contagion effect modeling within both spatial and time approach. As the same index is utilized for contagion and divergence modeling, it is possible to analyze and compare these two opposite effects together basing on selected sovereign bond market data.

Keywords: sovereign credit risk; global debt market; contagion effect; divergence effect; stochastic modeling; copulas (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:cpn:umkcjf:v:6:y:2017:i:4:p:39-68

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