Correlation Changes between the Risk-Free Rate and Sovereign Yields of Euro Area Countries

45 Pages Posted: 3 Feb 2017

See all articles by Roberto A. De Santis

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Michael Stein

University of Duisburg-Essen

Date Written: November 17, 2016

Abstract

We study correlations between the risk-free rate and sovereign yields of ten euro area countries using smooth transition conditional correlation GARCH (STCC-GARCH) specifications, controlling for credit risk in mean and variance equations and conditioning non-linearly to liquidity risk. Correlations are state-dependent and heterogeneous across jurisdictions. Using panel vector autoregression models, we identify the macro factors influencing the correlations: interbank credit risk, the Greek crisis, and break-up risk. We show that the European Central Bank’s asset purchase programmes helped restore the pass-through relationship. We also make a methodological contribution by estimating all STCC-GARCH parameters at once and introducing an STCC-GARCHX.

Keywords: monetary policy, government bonds, smooth transition models, euro area

JEL Classification: G12, G15

Suggested Citation

De Santis, Roberto A. and Stein, Michael, Correlation Changes between the Risk-Free Rate and Sovereign Yields of Euro Area Countries (November 17, 2016). ECB Working Paper No. 1979. Available at SSRN: https://ssrn.com/abstract=2910915

Roberto A. De Santis (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Michael Stein

University of Duisburg-Essen ( email )

Universitätsst. 12
Duisburg, 45117
Germany

HOME PAGE: http://www.fmoek.wiwi.uni-due.de/

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