High- and Low-Frequency Correlations in European Government Bond Spreads and Their Macroeconomic Drivers

Simona Boffelli, Vasiliki Skintzi and Giovanni Urga

Journal of Financial Econometrics, 2017, vol. 15, issue 1, 62-105

Abstract: We propose to adopt high-frequency DCC-MIDAS models to estimate high- and low-frequency correlations in the 10-year government bond spreads for Belgium, France, Italy, the Netherlands, and Spain relative to Germany, from June 1, 2007 to May 31, 2012. The high-frequency component, reflecting financial market conditions, is evaluated at 15-minute frequency, while the low-frequency component, fixed through a month, depends on country-specific macroeconomic conditions. We find strong links between spreads volatility and worsening macroeconomic fundamentals; in presence of similar macroeconomic fundamentals relative spreads move together; the increasing correlation in spreads during the burst of the sovereign debt crisis cannot be entirely ascribed to macroeconomic factors but rather to changes in market liquidity.

Keywords: correlations; DECO; government bond spreads; high-frequency MIDAS models; macroeconomic variables; volatilities (search for similar items in EconPapers)
JEL-codes: C32 C58 E44 G12 H63 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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