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Measuring sovereign bond fragmentation in the Eurozone

Author

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  • Costola, Michele
  • Iacopini, Matteo

Abstract

Fragmentation in the sovereign bond market of the Eurozone involves divergences in borrowing costs and undermines the stability of the monetary union. In this paper, we propose an indicator of fragmentation between government bonds of the core and peripheral European countries. Using a regime-switching cointegration model, we identify the absence of fragmentation as periods where the bond yields of the two groups share a common stochastic trend in the long-run. The results show that the indicator of fragmentation is responsive to systemic stress events and is negatively related to the ECB’s monetary policy actions.

Suggested Citation

  • Costola, Michele & Iacopini, Matteo, 2023. "Measuring sovereign bond fragmentation in the Eurozone," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005323
    DOI: 10.1016/j.frl.2022.103354
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    References listed on IDEAS

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    More about this item

    Keywords

    Eurozone; Fragmentation; Government bonds; ECB; Cointegration; Regime switching;
    All these keywords.

    JEL classification:

    • G50 - Financial Economics - - Household Finance - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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