2021/07 | LEM Working Paper Series | ||||||||||||||||
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The Anatomy of Government Bond Yields Synchronization in the Eurozone |
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Claudio Barbieri, Mattia Guerini and Mauro Napoletano |
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Keywords | |||||||||||||||||
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Synchronization; Bond Yields; Factor Models; Random Matrix Theory; Monetary policy.
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JEL Classifications | |||||||||||||||||
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C38, E43, E58
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Abstract | |||||||||||||||||
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We investigate the synchronization of Eurozone's government bond yields at different maturities.
For this purpose, we combine principal component analysis with random matrix theory. We
find that synchronization depends upon yields maturity. Short-term yields are not synchronized.
Medium- and long-term yields, instead, were highly synchronized early after the introduction
of the Euro. Synchronization then decreased significantly during the Great Recession and the
European Debt Crisis, to partially recover after 2015. We show the existence of a duality between
our empirical results and portfolio theory and we point to divergence trades and flight-to-quality
effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage
synchronization as a requirement for the smooth transmission of conventional monetary policy in
the Eurozone.
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