European government bond dynamics and stability policies: taming contagion risks

Peter Schwendner, Martin Schuele, Thomas Ott and Martin Hillebrand

Journal of Network Theory in Finance

Abstract: ABSTRACT From 2004 to 2015, the market perception of the sovereign risks of euro area government;bonds experienced several different phases, reflected in a clear time structure;of the correlation matrix between the yield changes. "Core" and "peripheral";bonds cluster in a bloc-like structure, but the correlations between the blocs are timedependent;and even become negative in periods of stress. Using noise-filtered partial;correlation influences, this time-dependency can be evaluated and visualized using;network graphs. Our results support the view that market-implied spillover risks have;decreased since the European rescue and stability mechanisms came into force in;2011. EFSF bond issues have been trading as part of the "core" bloc since 2011. In;2015, spillover risks reappeared during the Eurogroup's negotiations with Greece,;although the periphery yields did not show risk spreads that were as large as those in;2012.

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