Time-scale analysis of co-movement in EU sovereign bond markets

TL;DR

This paper analyzes how the co-movement of 10-year sovereign bond yields in 11 EU countries changed over time and across frequencies, especially during the financial crisis, using wavelet analysis.

Contribution

It applies wavelet analysis to study frequency-dependent co-movement dynamics of EU sovereign bonds during crises, highlighting differences among country groups.

Findings

Co-movement decreased during the crisis for all country pairs.

Co-movement varies significantly across frequency scales.

Differences in co-movement are observed among core, periphery, and non-Eurozone countries.

Abstract

We study the co-movement of the 10-year sovereign bond yields of 11 EU countries. Our analysis is focused mainly on changes in co-movement during the financial crisis period, especially around two significant dates - the fall of Lehman Brothers, September 15, 2008, and the announcement of the increase of Greece's public deficit on October 20, 2009. We study co-movement dynamics using wavelet analysis, which allows us to observe how co-movement changes across frequencies and over time. We divide the countries into three groups: the core of the Eurozone, the periphery of the Eurozone and the states outside the Eurozone. The results indicate that co-movement decreased considerably during the crisis period for all country pairs but that there are significant differences among the groups. Furthermore, we demonstrate that the co-movement of bond yields is frequency (scale) dependent.