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

Boffelli, S., Skintzi, V. D. & Urga, G. (2016). High- and Low-Frequency Correlations in European Government Bond Spreads and Their Macroeconomic Drivers. Journal of Financial Econometrics, 15(1), pp. 62-105. doi: 10.1093/jjfinec/nbv023

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Abstract

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.

Item Type: Article
Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Journal of Financial Econometrics following peer review. The version of record Simona Boffelli, Vasiliki D. Skintzi, Giovanni Urga; High- and Low-Frequency Correlations in European Government Bond Spreads and Their Macroeconomic Drivers. Journal of Financial Econometrics 2015; 15 (1): 62-105. is available online at: https://doi.org/10.1093/jjfinec/nbv023
Uncontrolled Keywords: correlations, DECO, government bond spreads, high-frequency MIDAS models, macroeconomic variables, volatilities
Subjects: H Social Sciences > HB Economic Theory
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/16374

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