Comovement and Disintegration of EU Sovereign Bond Markets During the Crisis

Abstract

In this paper, we show that the comovement of bond yields in the EU before and during the European sovereign debt crisis is frequency-dependent. Using frequency cohesion and wavelet coherence, we demonstrate that the comovement is concentrated mainly at low frequencies. The comovement decreased in the eurozone during the crisis but remained high among countries with national currencies. Within the eurozone, we document a complex heterogeneity in the comovement that spans well beyond the traditional division between the core and the periphery. Overall, our results provide more credibility to the eurozone fragility hypothesis rather than to those who consider the fundamental factors to be the main driving force of the crisis.

Keywords: European sovereign debt crisis, Eurozone crisis, co-movement, contagion, European bonds, sovereign bonds

JEL Classification: C32, C49, C58, H63