The Anatomy of Government Bond Yields Synchronization in the Eurozone

45 Pages Posted: 22 Mar 2021

See all articles by Claudio Barbieri

Claudio Barbieri

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG); Scuola Superiore Sant'Anna, Institute of Management, Students

Mattia Guerini

University of Brescia - Department of Economics and Management; GREDEG CNRS; Scuola Superiore Sant'Anna di Pisa

Mauro Napoletano

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG); Observatoire Français des Conjonctures Economiques (OFCE); SKEMA Business School; Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Date Written: March 3, 2021

Abstract

We investigate the synchronization of Eurozone’s government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends upon yields maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased significantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We show the existence of a duality between our empirical results and portfolio theory and we point to divergence trades and flight-to-quality effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monetary policy in the Eurozone.

Keywords: Synchronization, Bond Yields, Factor Models, Random Matrix Theory, Monetary policy

JEL Classification: C38, E43, E58

Suggested Citation

Barbieri, Claudio and Guerini, Mattia and Napoletano, Mauro, The Anatomy of Government Bond Yields Synchronization in the Eurozone (March 3, 2021). Available at SSRN: https://ssrn.com/abstract=3797157 or http://dx.doi.org/10.2139/ssrn.3797157

Claudio Barbieri (Contact Author)

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG) ( email )

250, rue Albert Einstein
Valbonne, 06560
France

Scuola Superiore Sant'Anna, Institute of Management, Students ( email )

Pisa
Italy

Mattia Guerini

University of Brescia - Department of Economics and Management ( email )

Via S. Faustino 74/b
Brescia
Italy

GREDEG CNRS ( email )

Sophia-Antipolis
France

Scuola Superiore Sant'Anna di Pisa ( email )

Pisa, 56127
Italy

Mauro Napoletano

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG) ( email )

250, rue Albert Einstein
Valbonne, 06560
France

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

60, rue Dostoïevski
Sophia-Antipolis Cedex, 06902
France

HOME PAGE: http://www.ofce.sciences-po.fr

SKEMA Business School ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

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