Title: Explaining long-term bond yields synchronization dynamics in Europe
Authors: Oscar Fernandez - Vienna University of Economics and Business (Austria) [presenting]
Jesus Crespo Cuaresma - Vienna University of Economics and Business (Austria)
Abstract: The aim is to examine the factors that contribute robustly to explaining sovereign yield synchronization dynamics in the European Monetary Union. Using a time-varying measure of (long-term) government bond yields synchronization rates and Bayesian Model Averaging (BMA) methods, we show that turbulent economic times (recession and ZLB periods specifically) shape the association between lagged values of the synchronization rates and current ones. This result also holds when comparing the commonly named PI(I)GS countries relative to the others. Overall, synchronization rates are found to be highly persistent. Contrary to the yield spreads literature, we find that economic fundamentals describing fiscal positions (in levels) are not able to predict synchronization rates robustly. When analyzing how synchronization rates of economic fundamentals are related to the dependent variable of interest, we find that inflation synchronization rates are robustly associated with the sovereign yield synchronization rates. This effect is also dependent on whether the economy finds itself in the ZLB period or not, and whether the country belongs to the GIIPS category.