European government bond dynamics and stability policies: taming contagion risks

Abstract

European Stability Mechanism Disclaimer This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy.

Sentiment Analysis of European Bonds 2016–2018

“…The amplitudes of these negative correlation influences are larger (Figure 13) than during the Brexit referendum and French election cases. This pattern echoes the frequent spillover patterns during the 2015 negotiations between the Eurogroup and Greece (Schwendner et al, 2015).…”

“…The three political situations in Europe relevant for bond markets that gained the most public interest after 2015 were the 2016 Brexit referendum, the 2017 French presidential elections, and the 2018 Italian budget negotiations. For a detailed quantitative analysis, we picked a time window of 6 weeks for each of these three situations: Following Schwendner et al (2015), we use the Pearson correlation coefficient C ij = <r i r j >−<r i ><r j > σ i σ j of the bond return time series r t i and r t j between two markets i and j for 50 hourly bond returns during a window of 1 week, sampled from 08:00 to 17:00 CET. To transform the bond yield time series y t i into a bond return time series r t i , we apply a duration approximation:…”

“…Many of these authors use variations of the Diebold and Yilmaz (2014) variance-decomposition framework that allows applying network theory to interpret the time-lagged variance contributions as variance spillover effect between markets. Schwendner et al (2015) applied a correlation influence approach from Kenett et al (2010). This approach does not employ a time lag structure and therefore, does not address realized variance spillover across time, but the current perception regarding spillover risk reflected in bond correlations.…”

Eurozone Network Connectedness During Calm and Crisis: Evidence from the MTS Platform for Interdealer Trading of European Sovereign Debt

“…Other relevant literature includes Schwendner et al (2015) who use partial correlation networks to analyse European government bond dynamics from [2004][2005][2006][2007][2008][2009][2010][2011][2012][2013][2014][2015]. They find contagion risks decreased since the European rescue and stability mechanisms in 2012.…”

Score-Driven Systemic Risk Signaling for European Sovereign Bond Yields and CDS Spreads

“…Still, bond yield data have the advantage that they are available over a much longer time span and a wider set of counterparties. For this reason, a number of authors have also used bond yield data to measure systemic sovereign debt risk; see for example Ang and Longstaff (2013) and Schwendner et al (2015).…”