Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/243503 
Year of Publication: 
2021
Series/Report no.: 
LEM Working Paper Series No. 2021/07
Publisher: 
Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM), Pisa
Abstract: 
We investigate the synchronization of Eurozone's government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends upon yields maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased significantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We show the existence of a duality between our empirical results and portfolio theory and we point to divergence trades and flight-to-quality effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monetary policy in the Eurozone.
Subjects: 
Synchronization
Bond Yields
Factor Models
Random Matrix Theory
Monetary policy
JEL: 
C38
E43
E58
Document Type: 
Working Paper

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