Volatility-Spillover Effects in European Bond Markets

Abstract

We analyze volatility spillover from the US and aggregate European bond markets into individual European bond markets using a GARCH volatility-spillover model. We find strong statistical evidence of volatility spillover from the US and aggregate European bon markets. For the EMU countries, the US volatility-spillover effects are rather weak (in economic terms) whereas the European volatility-spillover effects are strong. The bond markets of the EMU countries have become much more integrated after the introduction of the euro and in recent years, they have become close to being perfectly integrated. The main driver of the integration appears to be convergence in interest rates.

Keywords: Euro Introduction, Government Bonds, Integration of Bond Markets, International Bond Markets, Volatility Spillover

JEL Classification: C32, E43, F36, G12, G15