Title: The disintegration of EMU government bond markets
Authors: Christian Leschinski - Leibniz University Hannover (Germany)
Michelle Voges - Leibniz University Hannover (Germany) [presenting]
Philipp Sibbertsen - University of Hannover (Germany)
Abstract: The aim is to analyze market integration among long term government bonds in the Eurozone from the introduction of the Euro in 1999 to the Subprime mortgage crisis and the EMU debt crisis. We test for the existence and stability of equilibria between the interest rates using semiparametric tests for fractional cointegration and also propose a test for the dissolution of an existing fractional cointegrating relationship. This econometric framework allows us to establish several new findings. We find that EMU government bond markets were economically integrated in the initial phase after the introduction of the Euro, but markets disintegrated shortly thereafter, which was long before the crisis periods. We find that for most of the time since the introduction of the Euro there was no correction mechanism that would push interest rates on EMU government bonds towards a joint equilibrium. These findings can be explained by arguments from the theory on optimum currency areas and we discuss their implications for the interrelation of the Subprime mortgage crisis and the EMU debt crisis.