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Seoul Journal of Economics - Vol. 30 , No. 1
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Seoul Journal of Economics - Vol. 30, No. 1, pp. 1-17
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2017
Received 22 Nov 2016 Revised 10 Jan 2017 Accepted 12 Jan 2017

Bond Spreads, Market Integration and Contagion in the 2007-2008 Crisis
Jae-Young Kim ; Dong-Hyeon Ahn ; Eun-Young Ko
Jae-Young Kim, Corresponding author, Department of Economics, Seoul National University, Seoul, 08826, South Korea, Tel: 82-2-880-6390, Fax: 82-2-886-4231 (jykim017@snu.ac.kr)
Dong-Hyeon Ahn, Department of Economics, Seoul National University, Seoul, 08826, South Korea, Tel: 82-2-880-2690, Fax: 82-2-886-4231 (ahnd@snu.ac.kr)
Eun-Young Ko, Department of Economics, Seoul National University, Seoul, 08826, South Korea (eunyoungko@snu.ac.kr)

Funding Information ▼

JEL Classification: C22, F36, F41

Abstract

Yield spreads on sovereign bonds represent market expectations for the economic performance of issuing countries. In the international financial market, yield spreads also reflect the extent to which the issuing countries are integrated into the global market. We analyze market integration and interconnectedness for several countries by studying the characteristics of yield spreads of long-term bonds from December 1, 2006 to March 31, 2010. Our analysis is based on a latent factor model with the following factors: world factor, the regional factor, the country-specific factor, and the US shock. Our results show that there are clear contagion effects of the 2007-2008 crisis, which originated from the U.S., on all emerging economies under consideration. Stronger effects are observed on countries with relatively higher susceptibility to world factors before crisis. Mixed effects of regional factors are shown with similarities and differences across regions and countries. Relatively stronger effects of country-specific factors are shown in Korea, Japan, the U.K., and the U.S.

Keywords: Market integration, Contagion, Economic crisis, Factor analysis
Acknowledgments

The authors are grateful to a co-editor and two anonymous referees for helpful comments on the earlier version of this paper. The research of this paper was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2011-330-B00054) and by the Center for National Competitiveness in the Institute of Economic Research of Seoul National University.

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