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Correlation changes between the risk-free rate and sovereign yields of euro area countries

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  • De Santis, Roberto A.
  • Stein, Michael

Abstract

We study correlations between the risk-free rate and sovereign yields of ten euro area countries using smooth transition conditional correlation GARCH (STCC-GARCH) specifications, controlling for credit risk in mean and variance equations and conditioning non-linearly to liquidity risk. Correlations are state-dependent and heterogeneous across jurisdictions. Using panel vector autoregression models, we identify the macro factors influencing the correlations: interbank credit risk, the Greek crisis, and break-up risk. We show that the European Central Bank JEL Classification: G12, G15

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  • De Santis, Roberto A. & Stein, Michael, 2016. "Correlation changes between the risk-free rate and sovereign yields of euro area countries," Working Paper Series 1979, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20161979
    Note: 185689
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    Cited by:

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    3. repec:mth:ijafr8:v:8:y:2018:i:4:p:115-138 is not listed on IDEAS
    4. Franck Martin & Jiangxingyun Zhang, 2017. "Impact of QE on European sovereign bond market," Economics Working Paper Archive (University of Rennes & University of Caen) 2017-04, Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS.

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    Keywords

    euro area; government bonds; monetary policy; smooth transition models;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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