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

Abstract

This paper examines the connectedness of the Eurozone sovereign debt market over the period [2005][2006][2007][2008][2009][2010][2011]. By employing measures built from the variance decompositions of approximating models we are able to define weighted, directed networks that enable a deeper understanding of the relationships between the Eurozone countries. We find that connectedness in the Eurozone was very high during the calm market conditions preceding the global financial crisis but decreased dramatically when the crisis took hold, and worsened as the Eurozone sovereign debt crisis emerged. The drop in connectedness was especially prevalent in the case of the peripheral countries with some of the most peripheral countries deteriorating into isolation. Our results have implications for both market participants and regulators.

Short-Run Disequilibrium Adjustment and Long-Run Equilibrium in the International Stock Markets: A Network-Based Approach

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“…D'Agostino and Ehrmann (2014) pointed to an overreaction of the market given the change in fundamentals and thus to a structural change in longer-term risk perception. Gross and Kok (2013), Alter and Beyer (2014), Broner et al (2014), Glover and Richards-Shubik (2014), Shoesmith (2014), Erce (2015), Li and Waterworth (2016), Lange et al (2017) discussed the relationships between private and public sector bonds, between sovereign bonds and credit derivatives, and the transmission channels between bank risk and sovereign risk. Gerlach-Kristen (2015), Blasques et al (2016), Ehrmann and Fratzscher (2017), Moessner (2018), Arakelian et al (2019) confirmed the stabilizing impact of ECB measures on bond spreads after 2012.…”

Sentiment Analysis of European Bonds 2016–2018

“…D'Agostino and Ehrmann ( 2014 ) pointed to an overreaction of the market given the change in fundamentals and thus to a structural change in longer-term risk perception. Gross and Kok ( 2013 ); Alter and Beyer ( 2014 ); Broner et al ( 2014 ); Glover and Richards-Shubik ( 2014 ); Shoesmith ( 2014 ); Erce ( 2015 ); Li and Waterworth ( 2016 ); Lange et al ( 2017 ) discussed the relationships between private and public sector bonds, between sovereign bonds and credit derivatives, and the transmission channels between bank risk and sovereign risk. Gerlach-Kristen ( 2015 ); Blasques et al ( 2016 ); Ehrmann and Fratzscher ( 2017 ); Moessner ( 2018 ); Arakelian et al ( 2019 ) confirmed the stabilizing impact of ECB measures on bond spreads after 2012.…”