The pandemic emergency asset purchase and the sovereign bond market connectedness

Abstract

We examined the extent to which the biggest euro area sovereign bond markets are connected during the 2017-2020 period. Accordingly, we used the recent Gabaue (2020)'s approach viewed as an alternative to Diebold and Yilmaz's volatility connectedness methodology. We find that such markets are considerably connected during the whole period and the spillovers are relatively time varying. The results also show that the Spanish bond market is the primary net transmitter of shocks, followed by the Italian bond market, while the markets for Germany and France are the main net receivers. Second, we highlight some contribution of ECB's asset purchase and other monetary policy announcements to bilateral spillovers. Also, some pronounced spillovers are found to be generated from the monetary policy in US. Finally, the effect differs widely across bilateral linkages in terms of sign and magnitudes. A likely explanation is that investors started discriminating more through markets.