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Modelling correlation dynamics of EMU sovereign debt markets during the recent turmoil

Vassilios Babalos and Stavros Stavroyiannis

Research in International Business and Finance, 2017, vol. 42, issue C, 1021-1029

Abstract: The purpose of the present study is to explicitly model the correlation dynamics of Eurozone sovereign debt markets. Our analysis runs from 2000 through 2014. Time varying correlations are derived from a dynamic conditional correlation GARCH model (t-cDCC model). We document substantial variability in correlations that is time and region-dependent. Evidence suggests that the Lehman collapse coupled with the German banks’ bailout programme and the events that followed have undermined sovereign debt integration. Moreover, sensitivity analysis provides useful insights that global and regional risk factors play pivotal role in explaining correlation structure both before and after the onset of the Eurozone sovereign debt crisis. We believe that our results entail important implications for market authorities, international fixed income portfolio diversification and asset allocation.

Keywords: G10; G15; Sovereign credit markets; Asymmetric dynamic conditional correlation; Sovereign debt crisis; Panel analysis (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:riibaf:v:42:y:2017:i:c:p:1021-1029