Spillover and risk transmission in the components of the term structure of eurozone yield curve

ABSTRACT

The components of term structure of interest rate are an important element of the asset pricing models. This article studies the connectedness of the component of the sovereign yield curve across eleven earliest members of the Eurozone comprising six core countries (Germany, Netherlands, Finland, Austria, Belgium, France) and five peripheral countries (Greece, Ireland, Italy, Portugal and Spain) thus enabling us to analyse the short-, medium- and long-term yield curve dynamics of these eurozone economies. We document three distinct phases of connectedness described by the early eurozone period, global financial crisis and the European sovereign debt crises, and the period afterwards. We find a higher level of connectedness between the countries before the global financial crisis, which decreased to its lowest levels during the European debt crisis and is now rising back to higher levels following the European debt crisis. We find that, in general, the core countries are net transmitter of spillover, whereas, the peripheral countries are net receivers of spillover for the three components of the yield curve.

KEYWORDS:

• Connectedness analysis
• yield curve
• sovereign debt crisis
• GIIPS
• variance decompositions

JEL CLASSIFICATION:

• C53
• E43
• F36
• G12
• G17

Notes

¹ Please refer toDiebold and Li (2006) for complete details.:

Additional information

Funding

This work was supported by the Narodowe Centrum Nauki [2015/19/B/HS4/00378].