This paper examines the symmetry of correlation of sovereign bond yield
dynamics between eight Eurozone countries (Austria, Belgium, France, Germany,
Ireland, Italy, Portugal, and Spain) in the period from January 3, 2000 to
August 31, 2011. Asymmetry of correlation is investigated pair-wise by
applying the test of Yongmiao Hong, Jun Tu, and Guofu Zhou (2007). Whereas
the test of Hong, Tu, and Zhou (2007) is static, the present paper provides
also a dynamic version of the test and identifies time periods when the
correlation of Eurozone sovereign bond yield dynamics became asymmetric. We
identified seven pairs of sovereign bond markets for which the null
hypothesis of symmetry in correlation of sovereign bond yield dynamics can be
rejected. Calculating rolling-window exceedance correlation, we found that
the time-varying upper- (i.e. for positive yield changes) and lower-tail
correlations (i.e. for negative yield changes) for pair-wise observed
sovereign bond markets normally follow each other closely, yet during some
time periods (for most pair-wise observed countries, these periods are around
the September 11 attack on the New York City WTC and around the start of the
Greek debt crisis) the difference in correlation does increase. The results
show that the upper- and lower-tail correlation was symmetric before the
Eurozone debt crisis for most of the pair-wise observed sovereign bond
markets but has become much less symmetric since then.
Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries