CONTAGION AND DIVERGENCE ON SOVEREIGN BOND MARKETS

Piotr Jaworski, Kamil Liberadzki, Marcin Liberadzki

DOI: http://dx.doi.org/10.12775/CJFA.2017.022

Abstract


The paper gives evidence for significant interdependency between sovereign bond yields during pre-crisis period as well as after the recent global debt crisis broke out. These interdependencies can be classified either as contagion or divergence. Both effects should be understood as an increase in interdependency among different assets as a result of a significant shock. Contagion refers to positive interdependency, while the negative correlation illustrates divergence effect. Basing on selected bonds, we found out that divergence effect prevails over contagion. What is more, there has been more divergence among the European Monetary Union (EMU) countries than between the EMU sovereigns and Japanese or the US bonds. Despite the increase of contagion level after the crisis, there was no worldwide retreat from bond markets as a result of global turbulences. While there is a numerous literature on sovereign bond contagion, we propose our methodology for bond divergence effect measuring. The paper organizes and presents main concepts for contagion effect modeling within both spatial and time approach. As the same index is utilized for contagion and divergence modeling, it is possible to analyze and compare these two opposite effects together basing on selected sovereign bond market data.

Keywords


sovereign credit risk; global debt market; contagion effect; divergence effect; stochastic modeling; copulas

Full Text:

PDF

References


Antonakakis, N., & Vergos, K. (2013). Sovereign Bond Yield Spillovers in the Euro Zone during the Financial and Debt Crisis. Journal of International Financial Markets. Institutions and Money, 26, 258–272. http://dx.doi.org/10.1016/j.intfin.2013.06.004.

Arghyrou, M.G., & Kontonikas, A. (2012). The EMU Sovereign-Debt Crisis: Fundamentals, Expectations and Contagion. Journal of International Financial Markets. Institutions and Money, 22(4), 658–677. http://dx.doi.org/10.1016/j.intfin.2012.03.003.

Balli, F. (2009). Spillover Effects on Government Bond Yields in Euro Zone. Does Full Financial Integration Exists in European Government Bond Markets? Journal of Economics and Finance, 33(4), 331–363. http://dx.doi.org/10.1007/s12197-008-9029-3.

Beirne, J., & Fratzscher, M. (2013). The Pricing of Sovereign Risk and Contagion during the European Sovereign Debt Crisis. Journal of International Money and Finance, 34, 60–82. http://dx.doi.org/10.1016/j.jimonfin.2012.11.004.

Bradley, B., & Taqqu, M. (2004). Framework for Analyzing Spatial Contagion between Financial Markets. Finance Letters, 2(6), 8–15.

Durante, F., & Foscolo, E. (2013). An Analysis of the Dependence Among Financial Markets by Spatial Contagion. International Journal of Intelligent Systems, 28(4), 319–331. http://dx.doi.org/10.1002/int.21578.

Durante, F., Foscolo, E., & Weissensteiner, A. (2017). Dependence between Stock Returns of Italian Banks and the Sovereign Risk. Econometrics 2017, 5(23), 1–14. http://dx.doi.org/10.2139/ssrn.2124934.

Durante, F., & Jaworski, P. (2010). Spatial Contagion between Financial Markets: A Copula-Based Approach. Applied Stochastic Models in Business and Industry, 26(5), 551–564. http://dx.doi.org/10.1002/asmb.799.

Durante, F., & Sempi, C. (2010). Copula Theory: An Introduction. In P. Jaworski, F. Durante, W. Haerdle, T. Rychlik (Eds.). Copula Theory and Its Applications. Lecture Notes in Statistics. New York: Springer.

Durante, F., Foscolo, E., Jaworski, P., & Wang, H. (2014). A Spatial Contagion Measure for Financial Time Series. Expert Systems with Applications, 41(8), 4023–4034. http://dx.doi.org/10.1016/j.eswa.2013.12.020.

Durante, F., Foscolo, E., Jaworski, P., & Wang, H. (2015). Connectedness Measures of Spatial Contagion in the Banking and Insurance Sector. In P. Grzegorzewski, M. Gagolewski, O. Hryniewicz, M.A. Gil (Eds.). Strengthening Links Between Data Analysis and Soft Computing Advances in Intelligent Systems and Computing. New York: Springer, 217–232. http://dx.doi.org/10.1007/978-3-319-10765-3.

Ehrmann, M., Fratzscher, M., & Rigobon, R. (2005). Stock, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission, working paper, http://www.nber.org/papers/w11166.pdf (accessed: 18.04.2018).

Embrechts, P. (2009). Copulas: A Personal View. Journal of Risk and Insurance, 76(3), 639–650. http://dx.doi.org/10.1111/j.1539-6975.2009.01310.x.

Jaworski, P., & Pitera, M. (2014). On Spatial Contagion and Multivariate GARCH Models. Applied Stochastic Models in Business and Industry, 30(3), 303–327. http://dx.doi.org/10.1002/asmb.1977.

Joe, H. (2014). Dependence Modeling with Copulas. Boca Raton: CRC Press.

Kemp, M. (2011). Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails. Chichester: Wiley Finance. http://dx.doi.org/10.1002/9781119207030.ch3.

Mazier, J., & Petit, P. (2013). In Search of Sustainable Paths for the Eurozone in the Troubled Post-2008 World. Cambridge Journal of Economics, 37, 513–532. http://dx.doi.org/10.1093/cje/bet012.

Mink, M., & de Haan, J. (2013). Contagion during the Greek Sovereign Debt Crisis. Journal of International Money and Finance, 34, 102–113. http://dx.doi.org/10.1016/j.jimonfin.2012.11.006.

Muellbauer, J. (2013). Conditional Eurobonds and the Eurozone Sovereign Debt Crisis. Oxford Review of Economic Policy, 29(3), 610–645. http://dx.doi.org/10.1093/oxrep/grt032.

Nelsen, R.B. (2006). An Introduction to Copulas. New York: Springer. http://dx.doi.org/10.1007/978-1-4757-3076-0.

Sklar, A. (1959). Fonctions de Répartition à n Dimensions et Leurs Marges. Publications de l’Institut de Statistique de l’Université de Paris, 8, 229–231.

World Bank (2016). Definitions of Contagion, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/EXTMACROECO/0,,contentMDK:20889756~pagePK:64168182~piPK:64168060~theSitePK:477872,00.html (accessed: 1.09.2016).

Yunus, N. (2013). Contagion in International Financial Markets: A Recursive Cointegration Approach. Journal of Multinational Financial Management, 23(4), 327–337. http://dx.doi.org/10.1016/j.mulfin.2013.06.








ISSN 2300-1240 (print)
ISSN 2300-3065 (online)

Partnerzy platformy czasopism