New research on Eurozone sovereign bond market finds ‘The Good, the Bad, and the Ugly’

• Two phases of the euro area sovereign bond market crisis are identified, the ‘bad’ and the 'ugly'
• Evidence of contagion during both is scant but relatively stronger in the ‘ugly’ phase.
• Contagion is transmitted from both peripheral and core member states.

New research released by the Central Bank analyses daily 10-year sovereign bond yield spreads over German Bunds, both before and during the euro area sovereign bond market crisis.  The Research Technical Paper ‘Contagion in Eurozone Sovereign Bond Markets?  The Good, The Bad and the Ugly’ (PDF 1.26MB)uses data from ten euro area member states (Austria, Belgium, Spain, Finland, France, Greece, Ireland, Italy, Netherlands, Portugal) and the US from January 2003 to December 2014.  ‘Good’ refers to a normal financial environment, while ‘Bad’ and ‘Ugly’ refer to two phases of the sovereign bond crisis identified from the data.

The RTP finds much greater bond yield volatility for Greece, Ireland, Portugal and Spain (GIPS) than core member states like the Netherlands and Finland during the crisis.  It also finds relatively few examples of contagion among the member states, and when it does occur, it does so more often in the ‘ugly’ than in the ‘bad’ stage of the crisis.  Contagion is transmitted not only from peripheral states but core member states as well according to the research.

The research was carried out by David Cronin and Lisa Sheenan of the Central Bank of Ireland and Thomas Flavin of Maynooth University. The views expressed in this research paper are those of the authors and do not necessarily represent those policy views of the Central Bank of Ireland or the European System of Central Banks (ESCB).

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