[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v11y2018i4p74-d178985.html
   My bibliography  Save this article

Measuring Financial Fragmentation in the Euro Area Corporate Bond Market

Author

Listed:
  • Guillaume Horny

    (DGEI, Banque de France, 75001 Paris, France)

  • Simone Manganelli

    (DG-Research, European Central Bank, Financial Research, 60314 Frankfurt am Main, Germany)

  • Benoit Mojon

    (Monetary and Economic Department, Bank for International Settlements, 4002 Basel, Switzerland)

Abstract
This paper analyses the determinants of euro area non-financial corporate bonds since the early 2000s, so as to gauge deviations from the law of one price. We decompose the spread between the yield of German, French, Italian and Spanish corporate bonds vis-à-vis the German Bund of similar maturity into country, credit and duration risk premia components via dummy regressions. We highlight three main findings. First, the initial phase of the financial crisis (2008–2009) caused an overall increase in credit risk premia. Since the beginning of 2013 credit risk premia are back to levels comparable to those preceding the financial crisis. Second, at the height of the euro area sovereign crisis (2011–2012), high credit risk premia were accompanied by strong and persistent signs of market fragmentation in Italy and Spain (but not in France). This fragmentation has reached its peak in the second half of 2012 and has started to recede only after the announcement of the OMT. Third, we provide a simple measure of financial integration across the big 4 member states of the euro area.

Suggested Citation

  • Guillaume Horny & Simone Manganelli & Benoit Mojon, 2018. "Measuring Financial Fragmentation in the Euro Area Corporate Bond Market," JRFM, MDPI, vol. 11(4), pages 1-19, October.
    • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:74-:d:178985
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/11/4/74/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/11/4/74/
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Zaghini, Andrea, 2016. "Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?," Journal of Financial Stability, Elsevier, vol. 23(C), pages 51-61.
    2. Duffie, Darrell & Saita, Leandro & Wang, Ke, 2007. "Multi-period corporate default prediction with stochastic covariates," Journal of Financial Economics, Elsevier, vol. 83(3), pages 635-665, March.
    3. Daniele Pianeselli & Andrea Zaghini, 2014. "The cost of firms� debt financing and the global financial crisis," Temi di discussione (Economic working papers) 950, Bank of Italy, Economic Research and International Relations Area.
    4. Koopman, Siem Jan & Kräussl, Roman & Lucas, André & Monteiro, André B., 2009. "Credit cycles and macro fundamentals," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 42-54, January.
    5. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2004. "Asset Prices and Trading Volume under Fixed Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1054-1090, October.
    6. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    7. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    8. Nicolae Gârleanu & Lasse Heje Pedersen, 2013. "Dynamic Trading with Predictable Returns and Transaction Costs," Journal of Finance, American Finance Association, vol. 68(6), pages 2309-2340, December.
    9. Broto, Carmen & Molina, Luis, 2016. "Sovereign ratings and their asymmetric response to fundamentals," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 206-224.
    10. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    11. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    12. Simon Gilchrist & Benoit Mojon, 2018. "Credit Risk in the Euro Area," Economic Journal, Royal Economic Society, vol. 128(608), pages 118-158, February.
    13. Raffaela Giordano & Marcello Pericoli & Pietro Tommasino, 2013. "Pure or Wake-up-Call Contagion? Another Look at the EMU Sovereign Debt Crisis," International Finance, Wiley Blackwell, vol. 16(2), pages 131-160, June.
    14. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    15. Alain Monfort & Jean-Paul Renne, 2014. "Decomposing Euro-Area Sovereign Spreads: Credit and Liquidity Risks," Review of Finance, European Finance Association, vol. 18(6), pages 2103-2151.
    16. Simon Gilchrist & Benoit Mojon, 2018. "Credit Risk in the Euro Area," Economic Journal, Royal Economic Society, vol. 128(608), pages 118-158, February.
    17. De Santis, Roberto A., 2015. "A measure of redenomination risk," Working Paper Series 1785, European Central Bank.
    18. Jack Bao & Jun Pan & Jiang Wang, 2011. "The Illiquidity of Corporate Bonds," Journal of Finance, American Finance Association, vol. 66(3), pages 911-946, June.
    19. Zhiguo He & Konstantin Milbradt, 2014. "Endogenous Liquidity and Defaultable Bonds," Econometrica, Econometric Society, vol. 82(4), pages 1443-1508, July.
    20. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
    21. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1046-1059, November.
    22. Michael Bleaney & Paul Mizen & Veronica Veleanu, 2012. "Bond Spreads as Predictors of Economic Activity in Eight European Economies," Discussion Papers 12/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    23. Dick-Nielsen, Jens & Feldhütter, Peter & Lando, David, 2012. "Corporate bond liquidity before and after the onset of the subprime crisis," Journal of Financial Economics, Elsevier, vol. 103(3), pages 471-492.
    24. Michael Ehrmann & Marcel Fratzscher, 2015. "Euro Area Government Bonds: Integration and Fragmentation during the Sovereign Debt Crisis," Discussion Papers of DIW Berlin 1479, DIW Berlin, German Institute for Economic Research.
    25. Edwin J. Elton & Martin J. Gruber & Deepak Agrawal & Christopher Mann, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, February.
    26. Friewald, Nils & Jankowitsch, Rainer & Subrahmanyam, Marti G., 2012. "Illiquidity or credit deterioration: A study of liquidity in the US corporate bond market during financial crises," Journal of Financial Economics, Elsevier, vol. 105(1), pages 18-36.
    27. De Santis, Roberto A., 2018. "Unobservable country bond premia and fragmentation," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 1-25.
    28. Dewachter, Hans & Iania, Leonardo & Lyrio, Marco & de Sola Perea, Maite, 2015. "A macro-financial analysis of the euro area sovereign bond market," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 308-325.
    29. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2014. "Dynamic Dispersed Information and the Credit Spread Puzzle," NBER Working Papers 19788, National Bureau of Economic Research, Inc.
    30. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2012. "Sovereign risk premiums in the European government bond market," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 975-995.
    31. Pianeselli, Daniele & Zaghini, Andrea, 2014. "The cost of firms’ debt financing and the global financial crisis," Finance Research Letters, Elsevier, vol. 11(2), pages 74-83.
    32. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    33. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    34. Marcello Bofondi & Luisa Carpinelli & Enrico Sette, 2018. "Credit Supply During a Sovereign Debt Crisis," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 696-729.
    35. De Santis, Roberto A., 2012. "The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal," Working Paper Series 1419, European Central Bank.
    36. Bar-Isaac, Heski & Shapiro, Joel, 2013. "Ratings quality over the business cycle," Journal of Financial Economics, Elsevier, vol. 108(1), pages 62-78.
    37. Jing-Zhi Huang & Ming Huang, 2012. "How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 2(2), pages 153-202.
    38. Riccardo Faini, 2006. "Fiscal policy and interest rates in Europe [‘Computing robust standard errors for within-group estimators’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 21(47), pages 444-489.
    39. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market? [‘What “hides” behind sovereign debt ratings?’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 24(58), pages 191-240.
    40. Lieven Baele, 2004. "Measuring European Financial Integration," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 20(4), pages 509-530, Winter.
    41. AfDB AfDB, . "Annual Report 2012," Annual Report, African Development Bank, number 461.
    42. Ang, Andrew & Longstaff, Francis A., 2013. "Systemic sovereign credit risk: Lessons from the U.S. and Europe," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 493-510.
    43. Borgy, V. & Laubach, T. & Mésonnier, J-S. & Renne, J-P., 2011. "Fiscal Sustainability, Default Risk and Euro Area Sovereign Bond Spreads Markets," Working papers 350, Banque de France.
    44. Manuel Adelino & Miguel A. Ferreira, 2016. "Bank Ratings and Lending Supply: Evidence from Sovereign Downgrades," The Review of Financial Studies, Society for Financial Studies, vol. 29(7), pages 1709-1746.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zaghini, Andrea, 2019. "The CSPP at work: Yield heterogeneity and the portfolio rebalancing channel," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 282-297.
    2. Stephanie Heck, 2022. "Corporate bond yields and returns: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(2), pages 179-201, June.
    3. Zaghini, Andrea, 2017. "A tale of fragmentation: Corporate funding in the euro-area bond market," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 59-68.
    4. Song Han & Hao Zhou, 2016. "Effects of Liquidity on the Non-Default Component of Corporate Yield Spreads: Evidence from Intraday Transactions Data," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-49, September.
    5. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).
    6. Okou, Cedric & Maalaoui Chun, Olfa & Dionne, Georges & Li, Jingyuan, 2016. "Can Higher-Order Risks Explain the Credit Spread Puzzle?," Working Papers 16-1, HEC Montreal, Canada Research Chair in Risk Management.
    7. Niels Gilbert, 2019. "Euro area sovereign risk spillovers before and after the ECB's OMT announcement," DNB Working Papers 636, Netherlands Central Bank, Research Department.
    8. Anténor-Habazac, Cassandre & Dionne, Georges & Guesmi, Sahar, 2018. "Cyclical variations in liquidity risk of corporate bonds," Working Papers 18-3, HEC Montreal, Canada Research Chair in Risk Management.
    9. Samir Kadiric, 2020. "The determinants of sovereign risk premiums in the UK and the European government bond market: The impact of Brexit," EIIW Discussion paper disbei271, Universitätsbibliothek Wuppertal, University Library.
    10. Javadi, Siamak & Mollagholamali, Mohsen, 2018. "Debt market illiquidity and correlated default risk," Finance Research Letters, Elsevier, vol. 26(C), pages 266-273.
    11. António Afonso & Frederico Silva Leal, 2017. "Sovereign yield spreads in the EMU: crisis and structural determinants," Working Papers Department of Economics 2017/09, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    12. Dieppe, Alistair & Mourinho Félix, Ricardo & Marchiori, Luca & Grech, Owen & Albani, Maria & Lalouette, Laure & Kulikov, Dmitry & Papadopoulou, Niki & Sideris, Dimitris & Irac, Delphine & Gordo Mora, , 2015. "Public debt, population ageing and medium-term growth," Occasional Paper Series 165, European Central Bank.
    13. Xuanjuan Chen & Jing-Zhi Huang & Zhenzhen Sun & Tong Yao & Tong Yu, 2020. "Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market," Management Science, INFORMS, vol. 66(2), pages 932-957, February.
    14. Kinateder, Harald & Wagner, Niklas, 2017. "Quantitative easing and the pricing of EMU sovereign debt," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 1-12.
    15. Maalaoui Chun, Olfa & Dionne, Georges & François, Pascal, 2014. "Credit spread changes within switching regimes," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 41-55.
    16. Okimoto, Tatsuyoshi & Takaoka, Sumiko, 2020. "No-arbitrage determinants of credit spread curves under the unconventional monetary policy regime in Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 64(C).
    17. Black, Jeffrey R. & Stock, Duane & Yadav, Pradeep K., 2016. "The pricing of different dimensions of liquidity: Evidence from government guaranteed bonds," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 119-132.
    18. Yoshio Nozawa, 2014. "What Drives the Cross-Section of Credit Spreads?: A Variance Decomposition Approach," Finance and Economics Discussion Series 2014-62, Board of Governors of the Federal Reserve System (U.S.).
    19. Zaghini, Andrea, 2021. "The Covid pandemic in the market: Infected, immune and cured bonds," CFS Working Paper Series 653, Center for Financial Studies (CFS).
    20. D’Agostino, Antonello & Ehrmann, Michael, 2014. "The pricing of G7 sovereign bond spreads – The times, they are a-changin," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 155-176.

    More about this item

    Keywords

    financial integration; credit risk; country premia; fragmentation index;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:74-:d:178985. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.