Dependence structures and systemic risk of government securities markets in central and eastern Europe: A CoVaR-copula approach

Abstract

In this study, we proposed a new empirical method by combining generalized autoregressive score functions and a copula model with high-frequency data to model the conditional time-varying joint distribution of the government bond yields between Poland/Czech Republic/Hungary, and Germany. Capturing the conditional time-varying joint distribution of these bond yields allowed us to precisely measure the dependence of the government securities markets. In particular, we found a high dependence of these government securities markets in the long term, but a low dependence in the short term. In addition, we report that the Czech Republic showed the highest dependence with Germany, while Hungary showed the lowest. Moreover, we found that the systemic risk dynamics were consistent with the idea that the global financial crisis not only had spillover effects on countries with weak economic fundamentals (e.g., Hungary, which had the highest systemic risk), but also had contagion effects for both CEEC-3 countries and Germany. Finally, we confirm that three major market events, namely the EU accession, the global financial crisis, and the European debt crisis, caused structural changes to the dynamic correlation.