European Government Bond Dynamics and Stability Policies: Taming Contagion Risks

25 Pages Posted: 20 Mar 2018

See all articles by Peter Schwendner

Peter Schwendner

Zurich University of Applied Sciences, Center for Asset Management

Martin Schüle

Zurich University of Applied Sciences, Institute of Applied Simulation

Thomas Ott

Zurich University of Applied Sciences, Institute of Applied Simulation

Martin Hillebrand

Frankfurt University of Applied Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2015

Abstract

From 2004 to 2015, the market perception of the sovereign risks of the euro area government bonds experienced several different phases, reflected in a clear time structure of the correlation matrix between the yield changes. “Core” and “peripheral” bonds cluster in a bloc-like structure, but the correlations between the blocs are time-dependent and even become negative in periods of stress. Using noise-filtered partial correlation influences, this time dependency can be evaluated and visualized using network graphs. Our results support the view that market-implied spillover risks have decreased since the European rescue and stability mechanisms came into force in 2011. EFSF bond issues have been trading as part of the “core” bloc since 2011. In 2015, spillover risks reappeared during the Eurogroup’s negotiations with Greece, although the periphery yields did not show risk spreads that were as large as those in 2012.

Keywords: Contagion Risk, Correlation Networks, Euro Area, Sovereign Bonds, European Stability Mechanism, Financial Stability

JEL Classification: C14, G01, G11, G12, G15, D85

Suggested Citation

Schwendner, Peter and Schüle, Martin and Ott, Thomas and Hillebrand, Martin, European Government Bond Dynamics and Stability Policies: Taming Contagion Risks (December 1, 2015). European Stability Mechanism Working Paper No. 8. Available at SSRN: https://ssrn.com/abstract=3144053 or http://dx.doi.org/10.2139/ssrn.3144053

Peter Schwendner

Zurich University of Applied Sciences, Center for Asset Management ( email )

School of Management and Law
Technoparkstrasse 2
Winterthur, CH 8401
Switzerland

Martin Schüle

Zurich University of Applied Sciences, Institute of Applied Simulation ( email )

Institute of Applied Simulation
Einsiedlerstrasse 31a
Wädenswil, 8820
Switzerland

Thomas Ott

Zurich University of Applied Sciences, Institute of Applied Simulation ( email )

Institute of Applied Simulation
Wädenswil, CH 8820
Switzerland

Martin Hillebrand (Contact Author)

Frankfurt University of Applied Sciences ( email )

Nibelungenplatz 1
Frankfurt / Main, 60318
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
11
Abstract Views
178
PlumX Metrics