Effects of macroeconomic and rating announcements on the correlation of peripheral government bond markets

Abstract

In this study we investigate the impact of conventional and unconventional measures made by central banks and rating announcements made by rating agencies on peripheral bonds correlations during the financial crisis (2007-2009) and the sovereign debt crisis (2010-2013). Previously, we estimate these correlations using the Dynamic Conditional Correlation (DCC) model proposed by Engle (2002). Our results reveal that peripheral bond markets became less integrated during the sovereign debt crisis and we find that negative news on interest rates and Quantitative Easing (QE) announcements had a negative impact on dynamic correlations and provided diversification opportunities. The effect of downgrades was also negative in most of the cases suggesting that the increased sovereign risk among peripheral countries lead to lower correlations.