The European Bond Markets Under Emu
34 Pages Posted: 8 Mar 2005
There are 2 versions of this paper
Date Written: December 2004
Abstract
In this Paper, we document how in the wake of monetary unification the markets for euro area sovereign and private-sector bonds have become increasingly integrated. Issuers and investors alike have come to regard the euro area bond market as a single one. Primary and secondary bond markets have become increasingly integrated on a pan-European scale. Issuance of corporate bonds has taken off on an unprecedented scale in continental Europe. In the process, both investors and issuers have reaped the considerable benefits afforded by greater competition in the underwriting of private bonds and auctioning of public ones, and by the greater liquidity of secondary markets. Bond yields have converged dramatically in the transition to EMU. The persistence of small and variable yield differentials for sovereign debt under EMU indicates that euro area bonds are still not perfect substitutes. However, to a large extent this does not reflect persistent market segmentation but rather small differentials in fundamental risk. Liquidity differences play at most a minor role, and this role appears to arise partly from their interaction with fundamental risk. The challenges still lying ahead are numerous. They include the unbalance between the German-dominated futures and the underlying cash market; the vulnerability of the cash markets' prices to free-riding and manipulation by large financial institutions; the possibility of joint bond issuance by euro area countries; the integration of clearing and settlement systems in the euro area bond market, and the participation of new accession countries' issuers to this market.
Keywords: Euro, bond market, financial integration, bond yield differential
JEL Classification: G15, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Emergence of the Euro as an International Currency
By Richard Portes and Hélène Rey
-
By Michael P. Dooley, David Folkerts-landau, ...
-
European Financial Markets after Emu: A First Assessment
By Jean-pierre Danthine, Francesco Giavazzi, ...
-
The Euro Area Financial System: Structure, Integration and Policy Initiatives
By Philipp Hartmann, Angela Maddaloni, ...
-
The Currency Composition of Foreign Exchange Reserves: Retrospect and Prospect
-
The Cost of Barriers to Entry: Evidence from the Market for Corporate Euro Bond Underwriting
-
The Euro and International Capital Markets
By Carsten Detken and Philipp Hartmann