Spillovers Among Sovereign Debt Markets: Identification by Absolute Magnitude Restrictions

57 Pages Posted: 16 May 2017

See all articles by Roberto A. De Santis

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Srecko Zimic

European Central Bank (ECB) - Directorate General Research

Date Written: May 5, 2017

Abstract

This paper studies spillovers among US and European sovereign yields. We provide a new method based on absolute magnitude restrictions of the impact matrix to identify the countries that were the main sources of spillovers. Despite the large size of shocks from euro area stressed countries, connectedness among sovereign yields declined between 2008 and 2012 due to financial fragmentation, particularly between countries with more divergent business and fiscal cycles. We show that none of the sovereign yields are insulated from foreign shocks and that shocks to the Greek bond market in 2010 explained 20-30% of the variance of sovereign yields in stressed countries, while in 2011-2012 Italy (not Spain) was the source of systemic risk.

Keywords: spillovers, contagion, connectedness, fragmentation, sovereign risk, SVAR identification

JEL Classification: C3, G2

Suggested Citation

De Santis, Roberto A. and Zimic, Srecko, Spillovers Among Sovereign Debt Markets: Identification by Absolute Magnitude Restrictions (May 5, 2017). ECB Working Paper No. 2055. Available at SSRN: https://ssrn.com/abstract=2968934 or http://dx.doi.org/10.2139/ssrn.2968934

Roberto A. De Santis (Contact Author)

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

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Srecko Zimic

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

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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