Euro Area Financial Fragmentation and Bond Market Stability

IMF Working Papers, September 26, 2025

Source details

Authors: Benjamin Mosk, Nander de Vette
Publication date: September 26, 2025
Type: IMF Working Paper (Working Paper No. 2025/194)
Core focus: Investigates financial fragmentation within the euro area and implications for bond market stability.

Three-step empirical approach:
- Construct a time-varying indicator of euro area financial fragmentation based on a principal component analysis of sovereign yield changes. The indicator captures the extent to which yields across different country groupings move in opposite directions.
- Construct a series of identified global risk shocks using a sign-restricted Bayesian vector auto-regression model applied to a set of financial market variables.
- Assess bond market stability/fragility by measuring the responsiveness of credit risk premiums to global risk shocks using a non-linear panel local projections method, distinguishing between regimes of higher and lower fragmentation.

During times of elevated fragmentation, both sovereign CDS premiums and corporate option-adjusted spreads react more strongly to a given global risk shock.
The elevated sensitivity to global risk shocks appears across both country groupings, indicating that in the higher-fragmentation regime, bond markets are more vulnerable throughout the euro area.
Implication drawn from findings: efforts to strengthen financial integration could contribute to greater bond market resilience.

Subject: Credit default swap, Credit risk, Financial markets, Financial regulation and supervision, Money, National accounts, Return on investment, Securities markets
Keywords: bond market resilience, bond market stability, Credit default swap, Credit risk, credit risk premiums, credit risk risk premium, euro area, financial fragmentation, financial market condition, Global, periphery credit risk, Return on investment, Securities markets