Volatility-Spillover Effects in European Bond Markets

Abstract

Volatility spillover from the US and aggregate European bond markets into individual European bond markets using a GARCH volatility-spillover model is analysed. Strong statistical evidence of volatility spillover from the US and aggregate European bond markets is found. For EMU countries, the US volatility-spillover effects are rather weak (in economic terms) whereas the European volatility-spillover effects are strong. The bond markets of EMU countries have become much more integrated after the introduction of the euro, and in recent years they have become close to being perfectly integrated. The main driver of the integration appears to be convergence in interest rates.