Abstract

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.