European government bond dynamics and stability policies: taming contagion risks

; ; ; (). European government bond dynamics and stability policies: taming contagion risks. Journal of Network Theory in Finance, 1, 4. Peer reviewed.

European government bond dynamics and stability policies: taming contagion risks

From 2004 to 2015, the market perception of the sovereign risks of euro area government bonds experienced several different phases, reflected in a clear time structure of the correlation matrix between the yield changes. “Core” and “peripheral” bonds cluster in a bloc-like structure, but the correlations between the blocs are time-dependent and even become negative in periods of stress.

Using noise-filtered partial correlation influences, this time-dependency can be evaluated and visualized using network graphs. Our results support the view that market-implied spillover risks have decreased since the European rescue and stability mechanisms came into force in 2011. EFSF bond issues have been trading as part of the “core” bloc since 2011.

In 2015, spillover risks reappeared during the Eurogroup’s negotiations with Greece, although the periphery yields did not show risk spreads that were as large as those in 2012.

Keywords Contagion risk · Euro area · Sovereign bonds · Financial stability · European stability mechanism · Correlation networks

ESM Working Paper #8:


- "Financial Risk & Network Theory Conference", Judge Business School, Cambridge, September 2015.
- "TradeTech FX", London, September 2015.
- "European Seminar of Bayesian Econometrics (ESOBE)", Gerzensee, October 2015.
- "9th Financial Risks International Forum", Bachelier Institute, Paris, March 2016.
- "Risk-Sharing Mechanisms for the European Union", European University Institute, Florence, May 2016.
- "Mathfinance Conference", Frankfurt, April 2017.
- "Forschungscluster Data Science", Hochschule Darmstadt, Juni 2017
- IMF, Washington DC, August 2017

Press coverage:

- Michael Ferber, "Geringes Ansteckungsrisiko eines «Grexit»?", NZZ 21.3.2015

- with Eugene Neduv: Eurobond Correlation Network: fearing the Grexit, Cambridge Risk Centre Viewpoints, 10.7.2015

- with Eugene Neduv: Eurobond Correlation Network: a case history, Cambridge Risk Centre Viewpoints, 21.7.2015

- Government Bond versus Equity Correlations within the Eurozone, Rectitude Markets, 1.10.2015

- Matei Rosca, "Credit risk in focus as experts say ECB's QE may fuel excessive leverage", S&P Global Market Intelligence, 25.3.2016

- Thomas Müller, "Seismograph für die Eurozone", Impact Dossier "Europäisch", 3/2016 

- Kaspar Wolfensberger, "Würde die Schweiz von einem Brexit profitieren?", 20 Minuten, 25.4.2016

- Charlotte Theile, "Vorbild Schweiz - Last und Lust, ein Aussenseiter zu sein", Süddeutsche Zeitung, 10.5.2016

- ESM Annual Report 2015, 16.6.2016

- Transparency International report on ESM, 6.3.2017

- ESM Annual Report 2016, 15.6.2017

Webtool: FNA-based Contagion Risk Monitor 

Related Cambridge Study: Eurozone Meltdown Stress Test Scenario