BENCHMARK BONDS INTERACTIONS UNDER REGIME SHIFTS
Dimitris A. Georgoutsos
Athens University of Economics & Business
Petros M. Migiakis
Bank of Greece
In the present paper we examine interactions among five benchmark ten year government bonds, namely those of the US, Germany, France, Italy and the Netherlands. Our aim is to illustrate empirically a network of interactions existing among the major bond markets of Europe andthe US market taking into account shifts in the underlying stochastic processes. For this purpose, and in contrast to the rest of the relevant empirical literature, after specifying the long-run equilibrium relations we estimate the linkages between the bond markets as subject to hidden Markov chains, by applying the Markov Switching Vector Error Correction framework (MS-VECM). This formulation is found to efficiently reflect the shifts brought about by significant economic events, such as the European monetary unification. As a result we illustrate different short-run relations referring to the periods before and after monetary union. Overall, our empirical results indicate that stronger interactions between the markets of the system exist in the period after the EMU. Also, by means of a variance decomposition analysis we assess leader-follower relations which indicate that the benchmark status of bonds has changed since the introduction of the common monetary policy framework in Europe.
Keywords: Financial integration; bond markets; benchmarks; Markov Switching
JEL Classification: F21, F37, G12, G15
Acknowledgements: The authors have benefited from helpful comments and suggestions by Heather Gibson, George Kouretas, Georgios Gatopoulos and participants of the 12th Annual Conference of the Swiss Financial Markets Research Association. This work carries personal responsibility and does not necessarily reflect the views of the Bank of Greece.
Petros M. Migiakis
Bank of Greece, 21, El. Venizelou Ave.,
10250, Athens, Greece,
Tel. 0030 210 320 3073