Was a Deterioration in ‘Connectedness’ a Leading Indicator of the European Sovereign Debt Crisis?
27 Pages Posted: 11 May 2016 Last revised: 20 Oct 2019
Date Written: October 10, 2019
This paper investigates if changes in network connectedness of European sovereign bond markets from 2005 to 2011 was an indicator of the subsequent financial crisis. The unified methodology proposed by Diebold and Yilmaz (2014) is used to overcome weaknesses in alternative methodologies to measure connectedness. Our analysis shows that European sovereign bond market connectedness deteriorated with the onset of the global financial crisis that was exacerbated by the European sovereign debt crisis, with some peripheral countries deteriorating into isolation by 2011. Dynamic connectedness modelling shows that the Lanne-Nyberg total connectedness measure was much more volatile than the Pesaran-Shin approach and suggests that the Lanne-Nyberg variance decomposition was a leading indicator of instability from early 2008 to July 2008.
Keywords: Financial Crisis, Networks, Sovereign Bonds, Connectedness
JEL Classification: F45, G01, G15
Suggested Citation: Suggested Citation