Sovereign bond yield connectedness among major economies during turmoil

Abstract

Purpose This research evaluates yield connectedness dynamics between sovereign bonds among the G7 and larger economies such as China, Russia and India, encompassing the pandemic and the Russia–Ukraine war. Design/methodology/approach The study collated daily data on sovereign bond yields from January 2011 to November 2023. The data were divided into three subsamples: pre-COVID, COVID-19 and Russia–Ukraine war periods. The Diebold and Yilmaz connectedness approach with the time-varying parameter vector autoregression (TVP-VAR) model is applied to investigate the connectedness among the countries. Findings Germany, the United States, Canada and the UK were the major transmitters, with Germany and the US as the prime net transmitters. Japan, India and Italy were net receivers. Japan consistently receives net spillovers from Canada, Germany and the USA, while transmitting to the UK. Italy mainly receives from Germany and France, while China transmits to the UK, France, Germany and the USA. The UK receives from China and Russia, and India primarily from the USA and France. Research limitations/implications COVID-19 highlighted the stabilizing role of monetary and fiscal policies, particularly in Germany and India. Major economies’ interconnectedness emphasizes the need for diversified risk management and international cooperation to maintain sovereign bond market stability. Originality/value The study examines the impact of COVID-19 and the war on global financial markets, focusing on sovereign bond yield connectedness, identifying influential economies and offering insights for financial stability enhancement.