Hierarchical structures of the relationships between government bond markets in the EU countries

Abstract

The aim of this research is to evaluate the hierarchical structure of government bond markets in European Union (EU) countries. The hierarchical structures of the relationships between government bond markets in the EU countries are assessed in several stages. The correlation between EU government bond market indices is evaluated in the first stage of the research. In the second stage, the calculated correlation coefficients are converted into metric distances with the smallest distances between the markets used for plotting the minimum spanning tree. The results of the research revealed that the common currency and geographic proximity influence the metric distances between the government bond markets of the EU countries. In addition, there could be excluded several central government bond markets that most closely connect with other markets and form the base of the tree, i.e., Austria and Germany. The authors suggest adding government bond markets of Finland, Netherlands, and France to this group. On the contrary, government bond markets of new EU countries, as it was expected, tend to form separate clusters and move differently from the old ones.