Causality in the EMU sovereign bond markets

Abstract

Sovereign debt markets can be mechanisms of contagion for financial policy interventions, and financial risks in general. This study tests causality in-mean and in-variance on a full interest rate curve. The results for a daily sample of sovereign bond market prices (from France, Germany, Italy, Spain, Switzerland, the United Kingdom and the United States), show that latent factors of the United Stated (long-term) and Germany (short-term) are the main drivers of causality in-mean. The causality in-variance results show that the effect is mostly in the Economic and Monetary Union, highlighting Spain as the main driver.