Measuring Sovereign Bond Market Integration
Forthcoming, Review of Financial Studies
66 Pages Posted: 4 Aug 2016 Last revised: 3 Oct 2019
Date Written: March 16, 2017
We find that the degree and dynamics of sovereign bond market integration across 21 developed and 18 emerging countries is significantly heterogeneous. We show that better spanning can significantly enhance market integration through dissipating local risk premiums. Integration of the sovereign bond markets increases by about 10% on average, when a country moves from the 25th to the 75th percentile as a result of higher political stability and credit quality, lower inflation and inflation risk, and lower illiquidity. The 10% increase in integration leads to, on average, a decrease in the sovereign cost of funding of about 1% per annum.
Keywords: Credit Default Swap, credit quality, liquidity risk, macroeconomic risk, political stability, sovereign bond market integration, sovereign funding cost
JEL Classification: G15, G12, E44, F31, C5
Suggested Citation: Suggested Citation