Through the looking glass: Unveiling geopolitical risks and sovereign bond spillovers in the eurozone

This study introduces a novel time-varying parameter vector autoregressive (TVP-VAR) frequency connectedness approach for measuring the frequency transmission mechanism and dynamic spillovers among the sovereign bond markets of 13 Eurozone countries. Furthermore, the impact of global geopolitical risk (GPR) on the spillovers is examined through a time-varying Granger causality test. The results reveal strong spillovers in the Eurozone over time, especially since the spillover is predominantly driven by the short-term frequency domain. Besides, an asymmetry exists in the spillover effects between positive and negative returns, with spillovers being more pronounced for positive ones. The predictivity of geopolitical threats (GPRT) and geopolitical acts (GPRA) show significant time heterogeneity, particularly in response to specific extreme geopolitical risk events. Additionally, GPR, GPRT, and GPRA can significantly predict the spillovers for aggregate market return, specifically for positive ones, but it does not hold for negative returns (except for a temporary predictive capacity during COVID-19 of 2020). Finally, the Russia-Ukraine conflict predominantly influences sovereign bond market return spillovers through GPRT.