High- and Low-Frequency Correlations in European Government Bond Spreads and Their Macroeconomic Drivers

We propose to adopt high-frequency DCC-MIDAS models to estimate high- and low-frequency correlations in the 10-year government bond spreads for Belgium, France, Italy, the Netherlands, and Spain relative to Germany, from June 1, 2007 to May 31, 2012. The high-frequency component, reflecting financia...

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Bibliographic Details
Published in:Journal of financial econometrics 2017-01, Vol.15 (1), p.62-105
Main Authors: Boffelli, Simona, Skintzi, Vasiliki D., Urga, Giovanni
Format: Article
Language:English
Subjects:
Correlation analysis
Econometrics
Economic conditions
Government bonds
Macroeconomics
Sovereign debt
Studies
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Summary:We propose to adopt high-frequency DCC-MIDAS models to estimate high- and low-frequency correlations in the 10-year government bond spreads for Belgium, France, Italy, the Netherlands, and Spain relative to Germany, from June 1, 2007 to May 31, 2012. The high-frequency component, reflecting financial market conditions, is evaluated at 15-minute frequency, while the low-frequency component, fixed through a month, depends on country-specific macroeconomic conditions. We find strong links between spreads volatility and worsening macroeconomic fundamentals; in presence of similar macroeconomic fundamentals relative spreads move together; the increasing correlation in spreads during the burst of the sovereign debt crisis cannot be entirely ascribed to macroeconomic factors but rather to changes in market liquidity.
ISSN:1479-8409
1479-8417
DOI:10.1093/jjfinec/nbv023