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Searching high and low: Extremal dependence of international sovereign bond markets

Bojan Basrak ; Faculty of Science, Department of Mathematics University of Zagreb, Zagreb, Croatia
Petra Posedel orcid.org/0000-0002-4447-1643 ; Zagreb School of Economics and Management, Zagreb, Croatia
Marina Tkalec ; The Institute of Economics, Zagreb, Zagreb, Croatia
Maruška Vizek ; The Institute of Economics, Zagreb, Zagreb, Croatia

Abstract

This paper examines the degree of interdependence among sovereign bond markets in 24 developed and developing countries during times of stress or crisis using extreme value theory. We discuss the tail behavior of individual sovereign bond spreads and compare the shape of that tail to exponential and power-law distributions. We proceed by estimating bivariate tail dependence index χ and search for evidence of asymptotic tail dependence in sovereign bond spreads series. In order to establish the statistical significance of estimated bivariate tail dependence indices, we construct a bootstrap-based approach to searching for the presence of asymptotic tail dependence derived on the basis of Davis et al. (2012). Our empirical findings suggest that the US bond market does not exhibit extreme right-tail co-movements with European sovereign bond market turbulence. Even though the UK did not adopt the euro, its sovereign bond market exhibits statistically significant right-tail dependencies with a number of euro zone bond markets, possibly indicating that it is not immune to financial distress originating from the EMU. New EU member states exhibit more frequent right-tail dependencies with other new EU member states when compared to old EU members.

Keywords

sovereign bond spreads; extreme value theory; tail dependence

Hrčak ID:

165263

URI

https://hrcak.srce.hr/165263

Publication date:

19.7.2016.

Article data in other languages: croatian

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