Bond Spreads, Market Integration and Contagion in the 2007-2008 Crisis

Seoul Journal of Economics, Vol. 30, No. 1, p. 1-18, 2017

18 Pages Posted: 1 Mar 2017 Last revised: 3 Mar 2017

Jae-Young Kim

Seoul National University - Department of Economics

Dong-Hyun Ahn

Seoul National University - School of Economics

Eun-Young Ko

Seoul National University

Date Written: February 28, 2017

Abstract

Yield spreads on sovereign bonds represent market expectations for the economic performance of issuing countries. In the international financial market, yield spreads also reflect the extent to which the issuing countries are integrated into the global market. We analyze market integration and interconnectedness for several countries by studying the characteristics of yield spreads of long-term bonds from December 1, 2006 to March 31, 2010. Our analysis is based on a latent factor model with the following factors: world factor, the regional factor, the country-specific factor, and the US shock. Our results show that there are clear contagion effects of the 2007-2008 crisis, which originated from the U.S., on all emerging economies under consideration. Stronger effects are observed on countries with relatively higher susceptibility to world factors before crisis. Mixed effects of regional factors are shown with similarities and differences across regions and countries. Relatively stronger effects of country-specific factors are shown in Korea, Japan, the U.K., and the U.S.

Keywords: Market Integration, Contagion, Economic Crisis, Factor Analysis

JEL Classification: C22, F36, F41

Suggested Citation

Kim, Jae-Young and Ahn, Dong-Hyun and Ko, Eun-Young, Bond Spreads, Market Integration and Contagion in the 2007-2008 Crisis (February 28, 2017). Seoul Journal of Economics, Vol. 30, No. 1, p. 1-18, 2017. Available at SSRN: https://ssrn.com/abstract=2925008

Jae-Young Kim (Contact Author)

Seoul National University - Department of Economics ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742
Korea

Dong-Hyun Ahn

Seoul National University - School of Economics ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Eun-Young Ko

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

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