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Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals?

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  • Jan Kakes
  • Jan Willem van den End

Abstract

We present a metric for financial fragmentation in the Economic and Monetary Union (EMU), based on the higher moments of the distribution of sovereign spreads relative to macro-financial fundamentals. We apply fixed parameter and rolling regressions to allow for time variation in this relationship, while controlling for market sentiment. The metric shows that the observed moments of the spread distribution occasionally overshot the fundamentals-based benchmark until 2018. Since then, the moments of observed spreads have generally not exceeded the fundamentals-based moments, also not in the most recent period, despite the increase in interest rates. The latter may be attributed to backstop facilities of the European Central Bank (ECB), such as the Transmission Protection Instrument (TPI).

Suggested Citation

  • Jan Kakes & Jan Willem van den End, 2023. "Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals?," Working Papers 778, DNB.
    • Handle: RePEc:dnb:dnbwpp:778
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; Quantitative Easing; Sovereign risk; Sovereign spreads;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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