 Financial indicators signaling correlation changes in sovereign bond marketsRoberto De Santis () and Michael Stein Journal of Banking & Finance, 2015, vol. 56, issue C, 86-102 Abstract: We use a Smooth Transition Conditional Correlation GARCH (STCC-GARCH) model applied to the euro area monetary policy rates and sovereign yields of Italy, Spain and Germany at 5-year maturity to estimate the threshold level of the signals above which the sovereign bond market moves to a crisis regime. We show that the threshold to a crisis regime for Italy and Spain is reached when (i) their 5-year sovereign yield spreads amount to about 90 basis points; (ii) their 5-year CDS spreads amount to about 155 basis points or (iii) the 5-year spread between the Kreditanstalt für Wiederaufbau (KfW) bond and the German Bund amounts to about 30–40 basis points. Using impulse responses, we find that the STCC-GARCH with the KfW-Bund spread has leading properties, a feature corroborated by the fact that this indicator suggested a shift to a crisis regime already in August 2007 and has been signaling an improvement of the situation already in the autumn of 2012. An out-of-sample forecast of the STCC-GARCH model is also provided, which is both a novelty and a further robustness check for the stability of the model. Keywords: Correlation breakdowns; Monetary policy; Regime changes; Government bonds; Multivariate GARCH (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:56:y:2015:i:c:p:86-102 DOI: 10.1016/j.jbankfin.2015.02.018 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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