Financial Stress Transmission in EMU Sovereign Bond Market Volatility: A Connectedness Analysis
36 Pages Posted: 4 Feb 2015
Date Written: January 2015
This paper measures the connectedness in EMU sovereign market volatility between April 1999 and January 2014, in order to monitor stress transmission and to identify episodes of intensive spillovers from one country to the others. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each country and apply panel model techniques to investigate its determinants. Finally, to gain further insights, we examine the time varying behaviour of net pair-wise directional connectedness at different stages of the recent sovereign debt crisis.
Keywords: Sovereign debt crisis, Euro area, Market Linkages, Vector Autoregression, Variance Decomposition
JEL Classification: C53, E44, F36, G15
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