Integration of Sovereign Bonds Markets: Time Variation and Maturity Effects

Abstract

We examine time varying integration of developed (DM) and emerging (EM) market government bonds. Although we find an upward trend for most countries and maturity bands, we do observe reversals and negative trends among both DMs and EMs and for some maturities during the financial crisis. We examine potential factors that could explain the integration of the long vs. the short maturity bond segments and show that enhanced institutional quality, higher credit quality and better future investment opportunities would jointly contribute to a higher integration of the long vs. the short maturity bonds by about 15%.

Keywords: market integration, term structure of integration, sovereign bond markets, political risk, developed markets, emerging markets, sovereign risk.

JEL Classification: G15, G12, E44, F31, C5.