Was a Deterioration in ‘Connectedness’ a Leading Indicator of the European Sovereign Debt Crisis?
35 Pages Posted: 11 May 2016 Last revised: 4 Jan 2021
Date Written: October 10, 2019
This paper investigates network connectedness of European sovereign bond markets from 2005 to 2011. To overcome weaknesses in alternative methodologies to estimate network connectedness we adopt the unified methodology recommended by Diebold and Yilmaz (2014). Our analysis shows that European sovereign bond market connectedness deteriorated with the onset of the global financial crisis which was exacerbated by the European sovereign debt crisis, with some peripheral countries deteriorating into isolation by 2011. Dynamic connectedness modelling shows that the Lanne-Nyberg (2016) total connectedness measure was much more volatile than the Pesaran-Shin (1998) approach and suggests that the Lanne-Nyberg variance decomposition was a leading indicator of instability from early 2008 to July 2008, and should be used as these decomposition methods lead to different systemic risk and vulnerability rankings.
Keywords: Financial Crisis, Networks, Sovereign Bonds, Connectedness
JEL Classification: F45, G01, G15
Suggested Citation: Suggested Citation