We estimate the time-varying long-run correlations of European sovereign bond markets
to identify specific effects that are attributed to changing European regulatory and political
dynamics over the last twenty years. Our empirical results from using the DCC-MIDAS
methodology indicate that regulatory changes in Europe have created significant and negative
impact on the long-run correlations within the month where the regulation is decided to be
taken into action. This impact still remains in the following months and robust with respect
to the trend component of the long-run correlations. A direct implication is that the more
regulations the EU attempts to put in place, the lower the long-run convergence process of
sovereign bond markets is. We then analyse the structural shifts in the long-run correlation
dynamics with penalized contrasts methodology and try to find out the reasons of these
severe changes. Accordingly, some of the structural shifts overlap with the dates of a limited
number of regulatory changes, in addition to the major global economic and political events.
Item Type:
Article (Published)
Refereed:
Yes
Additional Information:
Article number: 105907
Uncontrolled Keywords:
DCC-MIDAS; European Union; Sovereign Bonds; Regulation; Financial Crisis