Time-Varying Importance of Country and Industry Factors in European Corporate Bonds

In this paper we study financial integration in Europe by looking at the time-varying relative importance of country versus industry factors in the European corporate bond market. Using a unique dataset that is representative for the universe of actively quoted corporate bonds, we find that although unconditionally the country factor dominates the industry factor, there is substantial time variation and no trend towards full integration. Breaks in the variation correspond with several important events in the European financial market integration, such as the introduction of the Euro and the sovereign debt crisis.