Evaluating Correlations in European Government Bond Spreads

We propose a DCC-MIDAS model to estimate high- and low-frequency correlations in the 10-year government bond spreads. The high-frequency component, reflecting financial market conditions, is evaluated at 15-minute frequency, while the low-frequency one, fixed through a month, depends on country specific macroeconomic fundamentals. Although macroeconomic factors contribute in explaining volatilities and orrelations, the increasing correlation in spreads during the pick of the sovereign debt crisis cannot be completely ascribed to macroeconomic factors.