Government bond market dynamics and sovereign risk: systemic or idiosyncratic? [component]

Bicu A.C., Candelon B.
2012 unpublished
This paper investigates the comovement of long-term government bond yields in the Eurozone. The methods used for identifying common trends and common cycles are cointegration and SCCF (serial correlation common feature). These low and high frequency comovement analyses based on asymptotic critical values fail to identify the almost perfect convergence of 10 year sovereign bond yields. After adjusting for heteroscedasticity we find strong evidence for similar cyclical movements and a reduced
more » ... s and a reduced number of "common cycles" for two separate groups (core and periphery). This confirms the hypothesis that in the European EMU (Economic and Monetary Union) the perceived risk of member states has converged. Based on the explanatory power of common and idiosyncratic components, we observe that sovereign yields are mainly driven by common risk factors and to a reduced degree by country specific characteristics. We investigate wether our results are affected by the recent sovereign debt crisis. With some notable exceptions, we find only small declines in the explanatory power of the common component. In line with recent literature on increased general risk aversion during times of stress, some policy implications for the common currency area are formulated.
doi:10.26481/umamet.2012032 fatcat:dizcq537gjh3zbxz4mc7m5t6ky