Sovereign bond yield spillovers in the Euro zone during the financial and debt crisis

Abstract

In this paper we examine the linkages of government bond yield spreads (BYS) between Euro zone countries over the period March 3, 2007 -June 18, 2012, thus considering the intriguing features of BYS spillovers during the global financial and the Euro zone debt crisis. Splitting our sample to Euro zone periphery and core countries, and using the VARbased spillover index approach of Diebold and Yilmaz (2012), we find that: (i) on average, BYS shocks tend to increase future BYS, and are related to news announcements and policy changes; (ii) BYS spillovers between Euro zone countries are highly intertwined, originating mostly from the periphery (Greece, Ireland, Italy, Portugal and Spain (GIIPS)) and to a lesser extent from the core (Austria, Belgium, France and Netherlands (ABFN)). The within-effect of BYS spillovers is of greater magnitude within the periphery than that within the core; iv) The between-effect (core vs periphery) of BYS spillovers suggests directional spillovers of greater magnitude from the periphery to the Euro zone core than vice-versa.Generalized impulse response analyses provide additional support to these findings. Our findings highlight the increased vulnerability of Euro zone from the destabilizing shocks originating from the beleaguered Euro zone countries in the periphery.

Business cycle and financial cycle spillovers in the G7 countries

“…The spillover methodology, which was originally applied to study the interaction between asset returns Yilmaz, 2009, 2012), has already attracted significant attention. For instance, it has been applied successfully to exchange rates (McMillan and Speight, 2010;Bubák et al, 2011;Antonakakis, 2012), equity markets (Yilmaz, 2010;Zhou et al, 2012), sovereign bond yield spreads (Antonakakis and Vergos, 2013), business cycles, growth and 1 Mendoza and Terrones (2008) and Gourinchas and Obstfeld (2011) provide similar studies with empirical evidence pointing in the same direction. See also Martin and Rey (2006) for international aspects.…”

Volatility of yields of government bonds among GIIPS countries during the sovereign debt crisis in the euro area

“…We obtained yields for 10 years government bonds in Greece, Ireland, Italy, Portugal and Spain (GIIPS countries), and also make its spreads against the yields of 10 years bonds in Germany to examine risk of selected countries (see Claeys & Vašíček, 2014;Ejsing et al, 2015). We split our whole estimated period into two sub-periods, pre-crises period from January 2006 to 15 th September 2008 when global financial crisis had been reflected in full, and the crisis sub-period from 23 rd April 2010 to December 2014 (see Antonakakis & Vergos, 2013). We excluded the times affected with the global financial crisis to estimate relations in the sovereign debt crisis because we investigated the relations among selected European bond markets.…”

Cross-border asset holdings and comovements in sovereign bond markets

“…The first strand of literature looks mainly at a certain point on the yield curve in the Euro area, especially long-term instruments such as 10-year government bonds (see e.g., Codogno et al, 2003;Manganelli and Wolswijk, 2009;Bernoth and Erdogan, 2012;Antonakakis and Vergos, 2013;Costantini et al, 2014). There are a few exceptions: Baele et al (2004) show that local yields with various maturities of all Euro-area countries become more integrated with those of Germany and France in the period 1999-2003 than in 1995-1998.…”