Time Value of the Money and Contagions on the Bond Markets

The yield curve should reflect the time value of the money to maintain the maturity transformation of the banking system. A tightened gap between the 3 month and 10 year yields on the bond market indicates liquidity shortage. This paper analyzes such liquidity shortages at the Euro area as well as at the US bond markets with their impact on the common movements of their Czech, Hungarian and Polish counterparts. While contagion is defined as significant increase in the correlations under special or normal circumstances, the divergence is defined as a significant decline; therefore this paper applied GARCH-based dynamic conditional correlation on the daily closing data. This paper detected mostly divergences on the bond markets under extreme changes on the yield curve. Contagion seemed much more intertemporal phenomena under different monetary conditions.