Sovereign Debt Markets in Euro-zone: Implications for Capital Markets Integration

Abstract

This paper examines the impact of the financial crisis of 2007-2008 on the Euro-zone markets integration by analyzing their sovereign debt markets convergence/ divergence to see if the Euro-zone stock markets are moving towards integration. As economic integration of Euro-zone proceeds under the banner of the Single Market Europe, it is vital to observe the degree of economic harmonization that exist in these member countries at different economic cycles. Thus, the purpose of this research is to explore the yield spreads on government debt across the Euro-zone nations at different time periods to observe if the spreads display any divergent trend over time. Analysis suggests that, time period 2008-2010 is a significant predictor for the government debt volatility of these countries financial stability and thus their economy’s strength. This indicates that the country’s yield spread and thus government debt is time dependent. Therefore, a country’s financial stability and thus their economic status (or level) would depend on the economic cycle. However, results also indicate that financial crisis has impacted some of the countries more than the others. Thus, exhibiting differences in economic stability (or strength) among the countries and therefore, this has important implications for the economic policy makers in the Euro-zone countries.