DP9803 The Impact of News and the SMP on Realized (Co)Variances in the Eurozone Sovereign Debt Market

Author(s): Roel Beetsma, Frank de Jong, Massimo Giuliodori, Daniel Widijanto
Publication Date: February 2014
Keyword(s): crisis, Eurozone, realized covariances, SMP, sovereign debt, spillovers
JEL(s): E62, G01, G12, G15, H63
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9803

We use realized variances and covariances based on intraday data from Eurozone sovereign bond market to measure the dependence structure of eurozone sovereign yields. Our analysis focuses on the impact of news, obtained from the Eurointelligence newsflash, on the dependence structure. More news raises the volatility of interest rates of financially distressed countries and decreases the covariance of distressed countries' yields with German bond yields, suggesting a flight-to-quality effect. Common news about the euro crisis and news about specific countries itself tend to raise the covariance of yields between distressed countries, indicating potential crisis spill-over effects. However, we do not detect spillover effects from news about third countries to the covariance between other country pairs. Bond purchases by the ECB under its Securities Markets Programme (SMP) mitigate the negative crisis spillovers among the distressed countries and reduce the flight-to-safety from the distressed countries to Germany.