Financial indicators signalling correlation changes in sovereign bond markets

Arbeitspapier

We use a Smooth Transition Conditional Correlation GARCH (STCC-GARCH) model applied to the euro area monetary policy rates and sovereign yields of Italy, Spain and Germany at 5-year maturity to estimate the threshold level of the signals above which the sovereign bond market moves to a crisis regime. We show that the threshold to a crisis regime for Italy and Spain is reached when (i) their 5-year sovereign yield spreads amount to 80-90 basis points; (ii) their 5-year CDS spreads amount to 120-130 basis points or (iii) the 5-year spread between the Kreditanstalt für Wiederaufbau (KfW) bond and the German Bund amounts to 25 basis points. Using impulse responses, we find that the STCC-GARCH with the KfW-Bund spread has leading properties, a feature corroborated by the fact that this indicator suggested a shift to a crisis regime already in August 2007 and has been signalling an improvement of the situation already in the autumn of 2012. An out-of-sample forecast of the STCC-GARCH model is also provided, which is both a novelty and a further robustness check for the stability of the model.

Object Details

• ISBN: 978-92-899-1154-2
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1746

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; International Financial Markets ; Financial Aspects of Economic Integration
• Subject: correlation breakdowns ; government bonds ; monetary policy ; multivariate GARCH ; regime changes

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): De Santis, Roberto A. ; Stein, Michael
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/154179
• Last update: 10.03.2025, 11:43 AM CET