8. Concluding remarks
In the paper we provide an assessment of the fragmentation of the euro-area corporate bond market by disentangling the different sources of risk which are priced in bond yield spreads at issuance. Starting from the assumption that in an integrated market the country of issuance of a bond should not influence the yield at origination (law of one price), we use the estimated country-specific effects as a measure of fragmentation. Our analysis starts from the model by Morgan and Stiroh (2001) and Sironi (2003) of the determinants of yield spread on bonds at issuance. We adapt the model in two ways: 1) we take into account the possibility that also the country in which the issuer is headquartered has a bearing on the yield spread; 2) we use Germany as a benchmark in order to have a direct estimate of the differences across countries, which we use as a measure of market fragmentation. In particular, referring to five distinct periods, we find that in the years before the burst of the global financial crisis there is no evidence of market fragmentation, i.e. the corporate bond market was well integrated. During the financial crisis, instead, the difference in the cost of funding with respect to German corporations became positive in several countries, signalling that financial agents started to include in the pricing of bonds also country-specific effects.
