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The geography of the great rebalancing in euro area bond markets during the sovereign debt crisis

Roland Beck (), Georgios Georgiadis and Johannes Gräb ()

Journal of Empirical Finance, 2016, vol. 38, issue PA, 449-460

Abstract: During the sovereign debt crisis investors rebalanced out of stressed and into non-stressed euro area countries, thereby contributing to the tensions in euro area financial markets. This paper examines the geographical pattern of this great rebalancing. Specifically, we test whether euro area and non-euro area investors adjusted their holdings of debt securities of euro area stressed and non-stressed countries disproportionately relative to benchmarks derived from a standard gravity model for portfolio choice. We find that non-euro area investors under-invested in stressed euro area countries, but did not over-invest in non-stressed euro area countries. As regards intra-euro area flows, we do not find evidence for a disproportionate slowdown of capital flows from non-stressed into stressed euro area countries. Instead, our results suggest that investors in stressed euro area countries disproportionately shifted capital into debt securities of non-stressed euro area countries. Finally, we find that both non-euro area investors' under-investment in stressed countries and stressed euro area investors' over-investment in non-stressed euro area countries ceased after the announcement of the ECB's OMT programme.

Keywords: Foreign investment; International capital flows; Euro area sovereign debt crisis; Gravity model (search for similar items in EconPapers)
JEL-codes: F34 F36 G15 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jempfin.2016.01.003

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