Critical transitions in Eurozone sovereign bond markets
Metadjer, Naoise Raghavendra, Srinivas
Metadjer, Naoise
Raghavendra, Srinivas
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Publication Date
2013
Type
Working Paper
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Citation
Naoise Metadjer; Srinivas Raghavendra (2013) Critical Transitions in Eurozone Sovereign Bond Markets. Working Paper
Abstract
In this paper we present empirical evidence that the sovereign bond markets may have undergone a catastrophic transition during the Eurozone debt crisis. We find evidence of a phenomenon called critical slowing down that theory predicts should precede such transitions. Two alternate approaches are used to detect critical slowing down. Firstly we estimate the domain of attraction, a methodology that has been used to detect critical transitions in ecological systems, which examines the rate at which a system returns to equilibrium following a stochastic shock. Secondly, we examine the statistical properties of sovereign bond yield data for trends which have been shown to precede catastrophic regime shifts between alternate steady states in many real world dynamical systems. Our results indicate that critical transitions approach provides an alternative method to study financial market crashes and the phenomenon of critical slowing down estimated from the statistical properties of the financial data may act asa useful early warning signal in predicting the crashes.
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Publisher
Department of Economics, National University of Ireland, Galway
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Attribution-NonCommercial-NoDerivs 3.0 Ireland