Bond Market Dependence during Expansions and Recessions in the Euro-area

Multivariate extremes exhibit either tail dependence or tail independence. Instead of assuming tail (in)dependence upfront, we use a flexible copula model by Huser and Wadsworth (2017) to model extreme government bond losses in European countries. We find that bond losses across countries in the north exhibit tail dependence, in contrast to tail independence across countries in the south. Between northern and southern country pairs, we also observe tail independence, but the level of remaining tail dependence is higher than for pairs of southern countries. We show that tail (in)dependence coefficients across European countries significantly vary from expansions to recessions. Tail dependence of bond losses paired with Finland or Spain significantly decreases during recessions, whereas it increases for pairs involving France or the Netherlands, but to a lesser extent.