Beyond fragmentation: unraveling the drivers of yield divergence in the euro area

Alicia Aguilar
Additional contact information
Alicia Aguilar: BANCO DE ESPAÑA

No 2520, Working Papers from Banco de España

Abstract: This paper provides a novel and high-frequency index of sovereign fragmentation in the euro area. The proposed methodology offers a decomposition of sovereign yields into the common trend, market conditions, and fundamentals-based divergence, which are uncorrelated to fragmentation. Therefore, the fragmentation index constitutes a bottom-line indicator for euro area central banks, as it measures disorderly market dynamics in sovereign markets not warranted by fundamentals. In that sense, this paper provides relevant conclusions about the effectiveness of monetary policy interventions, pointing to the significant effect of market stabilisation announcements, such as the Transmission Protection Instrument (TPI), in reducing sovereign fragmentation. I contribute to the literature by estimating the uncorrelated drivers of euro area yields divergence using a restricted principal components analysis. The estimated factors are then used to assess the effect of fragmentation, market conditions and fundamentals on country yields through several economic regimes, pointing to differences across countries and over time.

Keywords: principal components; monetary policy; quantitative easing; sovereign debt; financial crises; sovereign bond rates (search for similar items in EconPapers)
JEL-codes: C38 E52 E58 G01 G12 H63 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2025-04
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 25/Files/dt2520e.pdf First version, April 2025 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2520

DOI: 10.53479/39645

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().