Government bond market linkages: evidence from Europe

This paper examines linkages among six major European government bond markets (Germany, France, Italy, UK, Belgium and the Netherlands) during 1988–2003. There is weak evidence that a stable long-run relationship exists among the six markets during the sample period. Granger causal linkages are generally not pronounced between the markets, while the contemporaneous correlation is strong between bond market innovations. Allowing for both Granger causal relationships and contemporaneous correlation, forecast error variance decomposition suggests that European bond markets are generally interdependent without a distinctive leadership. There is also some evidence that the UK and Italy may be less integrated with other markets, possibly due to their nonparticipation in the European Monetary System during part of the sample period.