EUROPEAN FINANCIAL MARKET INTEGRATION: A CLOSER LOOK AT GOVERNMENT BONDS IN EUROZONE COUNTRIES
Paulo Alexandre
Rui Dias
Paula Heliodoro
Polytechnic Institute of Setúbal, School of Business and Administration, Esce, Campus do Instituto Politécnico de Setúbal, Estefanilha, 2914-503 Setúbal, Portugal
DOI: https://doi.org/10.31410/Balkans.JETSS.2020.3.1.78-86
Paulo Alexandre
Rui Dias
Paula Heliodoro
Polytechnic Institute of Setúbal, School of Business and Administration, Esce, Campus do Instituto Politécnico de Setúbal, Estefanilha, 2914-503 Setúbal, Portugal
DOI: https://doi.org/10.31410/Balkans.JETSS.2020.3.1.78-86
Balkans Journal of Emerging Trends in Social Sciences, (2020) , Vol 3, No 1
ISSN: 2620-164X
ISSN: 2620-164X
Abstract: This research aims to test the interdependencies between the Eurozone, US and Japanese debt markets, through the yields of 10-year sovereign bonds. The sample covers the period from 2002:01 to 2019:07. The analysis aims to provide answers to two questions: Has the global financial crisis accentuated the interdependencies in the Eurozone debt markets? If yes, how did it influence the movements in sovereign bond yields? The results suggest that the global financial crisis did not accentuate the levels of interdependence between the main Euro zone debt markets. In addition, the results suggest the existence of high movements in periods of crisis and not crisis. We also found that yields on PIIGS sovereign bonds decreased their interdependencies with their peers in the years 2002 to 2019, with the exception of the Greek debt market.
Keywords: Interdependencies, Eurozone Debt Markets, Global Financial Crisis.
JEL Classifications G18
REFERENCES
Abad, Pilar, Helena Chuliá, and Marta Gómez-Puig. 2010. “EMU and European Government Bond
Market Integration.” Journal of Banking and Finance.
Ang, Andrew, and Geert Bekaert. 2002a. “Regime Switches in Interest Rates.” Journal of Business
and Economic Statistics.
Antonakakis, Nikolaos, and Konstantinos Vergos. 2013. “Sovereign Bond Yield Spillovers in the Euro
Zone during the Financial and Debt Crisis.” Journal of International Financial Markets, Institutions
and Money.
Babecký, Jan, Luboš Komarek, and Zlatuše Komárková. 2017. “Financial Integration at Times of Crisis
and Recovery.” International Finance Review.
Baele, Lieven et al. 2004. “Measuring European Financial Integration.” Oxford Review of Economic
Policy.
Bai, Jushan, and Pierre Perron. 2003. “Critical Values for Multiple Structural Change Tests.” The
Econometrics Journal.
Bernoth, Kerstin, and Burcu Erdogan. 2012. “Sovereign Bond Yield Spreads: A Time-Varying Coefficient
Approach.” Journal of International Money and Finance.
Bhanot, Karan, Natasha Burns, Delroy Hunter, and Michael Williams. 2014. “News Spillovers from
the Greek Debt Crisis: Impact on the Eurozone Financial Sector.” Journal of Banking and Finance
38(1): 51–63. http://dx.doi.org/10.1016/j.jbankfin.2013.09.015.
Christiansen, Charlotte. 2014. “Integration of European Bond Markets.” Journal of Banking and Finance.
Claeys, Peter, Rosina Moreno, and Jordi Suriñach. 2012. “Debt, Interest Rates, and Integration of Financial
Markets.” Economic Modelling.
Claeys, Peter, and Bořek Vašíček. 2014. “Measuring Bilateral Spillover and Testing Contagion on Sovereign
Bond Markets in Europe.” Journal of Banking and Finance.
Dajcman, Silvo, Mejra Festic, and Alenka Kavkler. 2012. “Comovement Dynamics between Central
and Eastern European and Developed European Stock Markets during European Integration and
Amid Financial Crises – A Wavelet Analysis.” Engineering Economics.
Deltuvait, Vilma. 2015. “Investigation of Global Integration of the Central and Eastern European
Countries Sovereign Bond Markets.” 24(July): 182–91.
Dragomirescu-Gaina, Catalin, and Dionisis Philippas. 2013. “Is the EMU Government Bond Market a
Playground for Asymmetries?” Journal of Economic Asymmetries.
ECB. 2016. “The Productivity Challenge for Europe.” European Central Bank.
Ehrmann, Michael, and Marcel Fratzscher. 2017. “Euro Area Government Bonds – Fragmentation and
Contagion during the Sovereign Debt Crisis.” Journal of International Money and Finance.
Favero, Carlo A., and Alessandro Missale. 2016. “Contagion in the EMU-The Role of Eurobonds with
OMTs.” Review of Law and Economics.
Favero, Carlo A. 2013. “Modelling Sovereign Bond Spreads in the Euro Area: A Nonlinear Global
VAR Model.” In The GVAR Handbook.
Favero, Carlo, and Alessandro Missale. 2012. “Sovereign Spreads in the Eurozone: Which Prospects
for a Eurobond?” Economic Policy.
Georgoutsos, Dimitris A., and Petros M. Migiakis. 2013. “Heterogeneity of the Determinants of Euro-
Area Sovereign Bond Spreads; What Does It Tell Us about Financial Stability?” Journal of
Banking and Finance.
Gilmore, Claire G., Brian M. Lucey, and Ginette M. McManus. 2008. “The Dynamics of Central European
Equity Market Comovements.” Quarterly Review of Economics and Finance.
Gregory, Allan W., and Bruce E. Hansen. 1996. “Residual-Based Tests for Cointegration in Models
with Regime Shifts.” Journal of Econometrics 70(1): 99–126.
Inclán, Carla, and George C. Tiao. 1994. “Use of Cumulative Sums of Squares for Retrospective Detection
of Changes of Variance.” Journal of the American Statistical Association.
Islami, Mevlud, and Paul J.J. Welfens. 2013. “Financial Market Integration, Stock Markets and Exchange
Rate Dynamics in Eastern Europe.” International Economics and Economic Policy.
Kim, Suk-Joong, Brian M. Lucey, and Eliza Wu. 2005. “Dynamics of Bond Market Integration between
Existing and Accession EU Countries.” SSRN Electronic Journal.
Kim, Suk Joong, Brian M. Lucey, and Eliza Wu. 2018. “Dynamics of Bond Market Integration between
Established and New European Union Countries.” In World Scientific Studies in International
Economics.
Koop, Gary, M. Hashem Pesaran, and Simon M. Potter. 1996. “Impulse Response Analysis in Nonlinear
Multivariate Models.” Journal of Econometrics 74(1): 119–47.
Lanne, Markku. 2001. “Near Unit Root and the Relationship between Inflation and Interest Rates: A
Reexamination of the Fisher Effect.” Empirical Economics.
Lucotte, Yannick. 2015. “Euro Area Banking Fragmentation in the Aftermath of the Crisis: A Cluster
Analysis.” Applied Economics Letters.
Lütkepohl, Helmut, and Pentti Saikkonen. 1997. “Impulse Response Analysis in Infinite Order Cointegrated
Vector Autoregressive Processes.” Journal of Econometrics 81(1): 127–57. http://www.
sciencedirect.com/science/article/pii/S0304407697000377.
Manganelli, Simone, and Guido Wolswijk. 2009. “What Drives Spreads in the Euro Area Government
Bond Market?” Economic Policy.
Mayordomo, Sergio, María Abascal, Tatiana Alonso, and Maria Rodriguez-Moreno. 2015. “Fragmentation
in the European Interbank Market: Measures, Determinants, and Policy Solutions.” Journal
of Financial Stability.
Orlowski, Lucjan T., and Anna Tsibulina. 2014. “Integration of Central and Eastern European and the
Euro-Area Financial Markets: Repercussions from the Global Financial Crisis.” In Comparative
Economic Studies.
Pesaran, H Hashem, and Yongcheol Shin. 1998. “Generalized Impulse Response Analysis in Linear
Multivariate Models.” Economics Letters 58(1): 17–29. http://www.sciencedirect.com/science/
article/pii/S0165176597002140.
Pozzi, Lorenzo, and Guido Wolswijk. 2012. “The Time-Varying Integration of Euro Area Government
Bond Markets.” European Economic Review.
Pungulescu, Crina. 2013. “Measuring Financial Market Integration in the European Union: EU15 vs.
New Member States.” Emerging Markets Review.
Răileanu-Szeles, Monica, and Lucian Albu. 2015. “Nonlinearities and Divergences in the Process of
European Financial Integration.” Economic Modelling.
Santis, Roberto a De. 2012. “The Euro Area Sovereign Debt Crisis Safe Haven, Credit Rating Agencies
and the Spread of the Fever From Greece, Ireland and Portugal.” ECB Working Paper Series.
Schuknecht, Ludger, Jürgen von Hagen, and Guido Wolswijk. 2009. “Government Risk Premiums in
the Bond Market: EMU and Canada.” European Journal of Political Economy.
Sibbertsen, Philipp, Christoph Wegener, and Tobias Basse. 2014. “Testing for a Break in the Persistence
in Yield Spreads of EMU Government Bonds.” Journal of Banking and Finance.
Smolik, Filip, and Lukas Vacha. 2015. SSRN Time-Frequency Analysis of Co-Movement and Contagion
in EU Sovereign Bond Markets.
Sosvilla-Rivero, Simón, and Amalia Morales-Zumaquero. 2012. “Volatility in EMU Sovereign Bond
Yields: Permanent and Transitory Components.” Applied Financial Economics.
Volosovych, Vadym. 2011. “Measuring Financial Market Integration over the Long Run: Is There a
U-Shape?” Journal of International Money and Finance.
Yang, Lu, and Shigeyuki Hamori. 2013. “EU Accession, Financial Integration, and Contagion Effects:
Dynamic Correlation Analysis of CEEC-3 Bond Markets.” Transition Studies Review.
Keywords: Interdependencies, Eurozone Debt Markets, Global Financial Crisis.
JEL Classifications G18
REFERENCES
Abad, Pilar, Helena Chuliá, and Marta Gómez-Puig. 2010. “EMU and European Government Bond
Market Integration.” Journal of Banking and Finance.
Ang, Andrew, and Geert Bekaert. 2002a. “Regime Switches in Interest Rates.” Journal of Business
and Economic Statistics.
Antonakakis, Nikolaos, and Konstantinos Vergos. 2013. “Sovereign Bond Yield Spillovers in the Euro
Zone during the Financial and Debt Crisis.” Journal of International Financial Markets, Institutions
and Money.
Babecký, Jan, Luboš Komarek, and Zlatuše Komárková. 2017. “Financial Integration at Times of Crisis
and Recovery.” International Finance Review.
Baele, Lieven et al. 2004. “Measuring European Financial Integration.” Oxford Review of Economic
Policy.
Bai, Jushan, and Pierre Perron. 2003. “Critical Values for Multiple Structural Change Tests.” The
Econometrics Journal.
Bernoth, Kerstin, and Burcu Erdogan. 2012. “Sovereign Bond Yield Spreads: A Time-Varying Coefficient
Approach.” Journal of International Money and Finance.
Bhanot, Karan, Natasha Burns, Delroy Hunter, and Michael Williams. 2014. “News Spillovers from
the Greek Debt Crisis: Impact on the Eurozone Financial Sector.” Journal of Banking and Finance
38(1): 51–63. http://dx.doi.org/10.1016/j.jbankfin.2013.09.015.
Christiansen, Charlotte. 2014. “Integration of European Bond Markets.” Journal of Banking and Finance.
Claeys, Peter, Rosina Moreno, and Jordi Suriñach. 2012. “Debt, Interest Rates, and Integration of Financial
Markets.” Economic Modelling.
Claeys, Peter, and Bořek Vašíček. 2014. “Measuring Bilateral Spillover and Testing Contagion on Sovereign
Bond Markets in Europe.” Journal of Banking and Finance.
Dajcman, Silvo, Mejra Festic, and Alenka Kavkler. 2012. “Comovement Dynamics between Central
and Eastern European and Developed European Stock Markets during European Integration and
Amid Financial Crises – A Wavelet Analysis.” Engineering Economics.
Deltuvait, Vilma. 2015. “Investigation of Global Integration of the Central and Eastern European
Countries Sovereign Bond Markets.” 24(July): 182–91.
Dragomirescu-Gaina, Catalin, and Dionisis Philippas. 2013. “Is the EMU Government Bond Market a
Playground for Asymmetries?” Journal of Economic Asymmetries.
ECB. 2016. “The Productivity Challenge for Europe.” European Central Bank.
Ehrmann, Michael, and Marcel Fratzscher. 2017. “Euro Area Government Bonds – Fragmentation and
Contagion during the Sovereign Debt Crisis.” Journal of International Money and Finance.
Favero, Carlo A., and Alessandro Missale. 2016. “Contagion in the EMU-The Role of Eurobonds with
OMTs.” Review of Law and Economics.
Favero, Carlo A. 2013. “Modelling Sovereign Bond Spreads in the Euro Area: A Nonlinear Global
VAR Model.” In The GVAR Handbook.
Favero, Carlo, and Alessandro Missale. 2012. “Sovereign Spreads in the Eurozone: Which Prospects
for a Eurobond?” Economic Policy.
Georgoutsos, Dimitris A., and Petros M. Migiakis. 2013. “Heterogeneity of the Determinants of Euro-
Area Sovereign Bond Spreads; What Does It Tell Us about Financial Stability?” Journal of
Banking and Finance.
Gilmore, Claire G., Brian M. Lucey, and Ginette M. McManus. 2008. “The Dynamics of Central European
Equity Market Comovements.” Quarterly Review of Economics and Finance.
Gregory, Allan W., and Bruce E. Hansen. 1996. “Residual-Based Tests for Cointegration in Models
with Regime Shifts.” Journal of Econometrics 70(1): 99–126.
Inclán, Carla, and George C. Tiao. 1994. “Use of Cumulative Sums of Squares for Retrospective Detection
of Changes of Variance.” Journal of the American Statistical Association.
Islami, Mevlud, and Paul J.J. Welfens. 2013. “Financial Market Integration, Stock Markets and Exchange
Rate Dynamics in Eastern Europe.” International Economics and Economic Policy.
Kim, Suk-Joong, Brian M. Lucey, and Eliza Wu. 2005. “Dynamics of Bond Market Integration between
Existing and Accession EU Countries.” SSRN Electronic Journal.
Kim, Suk Joong, Brian M. Lucey, and Eliza Wu. 2018. “Dynamics of Bond Market Integration between
Established and New European Union Countries.” In World Scientific Studies in International
Economics.
Koop, Gary, M. Hashem Pesaran, and Simon M. Potter. 1996. “Impulse Response Analysis in Nonlinear
Multivariate Models.” Journal of Econometrics 74(1): 119–47.
Lanne, Markku. 2001. “Near Unit Root and the Relationship between Inflation and Interest Rates: A
Reexamination of the Fisher Effect.” Empirical Economics.
Lucotte, Yannick. 2015. “Euro Area Banking Fragmentation in the Aftermath of the Crisis: A Cluster
Analysis.” Applied Economics Letters.
Lütkepohl, Helmut, and Pentti Saikkonen. 1997. “Impulse Response Analysis in Infinite Order Cointegrated
Vector Autoregressive Processes.” Journal of Econometrics 81(1): 127–57. http://www.
sciencedirect.com/science/article/pii/S0304407697000377.
Manganelli, Simone, and Guido Wolswijk. 2009. “What Drives Spreads in the Euro Area Government
Bond Market?” Economic Policy.
Mayordomo, Sergio, María Abascal, Tatiana Alonso, and Maria Rodriguez-Moreno. 2015. “Fragmentation
in the European Interbank Market: Measures, Determinants, and Policy Solutions.” Journal
of Financial Stability.
Orlowski, Lucjan T., and Anna Tsibulina. 2014. “Integration of Central and Eastern European and the
Euro-Area Financial Markets: Repercussions from the Global Financial Crisis.” In Comparative
Economic Studies.
Pesaran, H Hashem, and Yongcheol Shin. 1998. “Generalized Impulse Response Analysis in Linear
Multivariate Models.” Economics Letters 58(1): 17–29. http://www.sciencedirect.com/science/
article/pii/S0165176597002140.
Pozzi, Lorenzo, and Guido Wolswijk. 2012. “The Time-Varying Integration of Euro Area Government
Bond Markets.” European Economic Review.
Pungulescu, Crina. 2013. “Measuring Financial Market Integration in the European Union: EU15 vs.
New Member States.” Emerging Markets Review.
Răileanu-Szeles, Monica, and Lucian Albu. 2015. “Nonlinearities and Divergences in the Process of
European Financial Integration.” Economic Modelling.
Santis, Roberto a De. 2012. “The Euro Area Sovereign Debt Crisis Safe Haven, Credit Rating Agencies
and the Spread of the Fever From Greece, Ireland and Portugal.” ECB Working Paper Series.
Schuknecht, Ludger, Jürgen von Hagen, and Guido Wolswijk. 2009. “Government Risk Premiums in
the Bond Market: EMU and Canada.” European Journal of Political Economy.
Sibbertsen, Philipp, Christoph Wegener, and Tobias Basse. 2014. “Testing for a Break in the Persistence
in Yield Spreads of EMU Government Bonds.” Journal of Banking and Finance.
Smolik, Filip, and Lukas Vacha. 2015. SSRN Time-Frequency Analysis of Co-Movement and Contagion
in EU Sovereign Bond Markets.
Sosvilla-Rivero, Simón, and Amalia Morales-Zumaquero. 2012. “Volatility in EMU Sovereign Bond
Yields: Permanent and Transitory Components.” Applied Financial Economics.
Volosovych, Vadym. 2011. “Measuring Financial Market Integration over the Long Run: Is There a
U-Shape?” Journal of International Money and Finance.
Yang, Lu, and Shigeyuki Hamori. 2013. “EU Accession, Financial Integration, and Contagion Effects:
Dynamic Correlation Analysis of CEEC-3 Bond Markets.” Transition Studies Review.
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