Recent Developments in Financial Integration in the Central and Eastern European Countries Sovereign Bond Markets

Abstract

Many academicians and international investors qualify the Central and Eastern European countries (CEECs) as a very homogenous group of countries in terms of sovereign risk. However, the introduction of the euro and the removal of exchange rate risk in some of the CEECs, the differences in perceived sovereign credit risks, liquidity and availability of sovereign credit default swap (CDS) of the CEECs’ are the main factors influencing the changes in financial integration in the CEECs’ sovereign bond markets. The objective of this study—to assess the financial integration of the Central and Eastern European countries sovereign bond markets after the introduction of the euro. The research methods: the systemic, logical and comparative analysis of the scientific literature, price-based indicators of financial integration recommended by European Central Bank (ECB). This empirical study focuses on monthly sovereign bonds yields data for 10 CEECs: Bulgaria, Czech Republic, Croatia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia for a 15 year period, i.e. from 2000 to 2015. The results of this empirical study suggest that CEECs’ sovereign bond market’s fragmentation receded further; however, the fragmentation of this market still remains. The most significant increase in CEECs’ sovereign bond market fragmentation was observed during recent financial crisis. The introduction of the euro and the removal of exchange rate risk in some CEECs do not affect the convergence of government bond yields to the euro-zone level.