Authors: Inês Da Cunha Cabral; Pedro Pires Ribeiro; João Nicolau
Addresses: ISEG, Lisbon School of Economics and Management, Universidade de Lisboa, Banco de Portugal, Rua do Quelhas 6, 1200-781 Lisboa, Portugal ' Banco de Portugal; Instituto Universitário de Lisboa (ISCTE-IUL), Business Research Unit (BRU-IUL), Av. Almirante Reis, 71, 1150-012, Lisboa, Portugal ' ISEG, Lisbon School of Economics and Management, Universidade de Lisboa, REM/CEMAPRE, Rua do Quelhas 6, 1200-781 Lisboa, Portugal
Abstract: This paper explores the relationship between stocks and sovereign bonds by means of the asymmetric detrended cross-correlation analysis (ADCCA). Drawing on data from 1999.01 to 2018.09 of the first wave of euro area countries, the full sample is divided into three subsets in accordance with economic and financial features. Some findings arise with striking implications for investors and policymakers. Firstly, empirical results show that cross-correlations differ from country to country, depending on the sub-period under analysis and on the time scale. Secondly, likewise within country estimates, cross-country linkages may point to fragmentation in the euro area with agents moving away from financial assets of lower-rated countries to invest in more robust economies in periods of turmoil. Thirdly, there is evidence of asymmetry since 'flight-to-quality' movements seem to be more relevant than 'flight-to-yield' episodes. Finally, while relationships were globally bidirectional until mid-2007, new causality patterns arose with the financial crisis.
Keywords: equities; sovereign bonds; euro area; fragmentation; cross-correlation; multiscales; asymmetry; causality.
International Journal of Monetary Economics and Finance, 2019 Vol.12 No.6, pp.511 - 537
Received: 12 Jan 2019
Accepted: 07 Aug 2019
Published online: 27 Jan 2020 *