Sovereign bond markets and financial volatility dynamics: Panel-GARCH evidence for six euro area countries

•This paper investigates the determinants of six EMU sovereign bond yield spreads.•We offer new Panel-GARCH models enhanced with key financial volatility features.•Overall, EMU spreads reflect concerns about credit, liquidity and risk appetite.•Higher yield spreads are less predictable and asymmetric effects seem negligible.•Our findings have substantial policy implications for the EMU sustainability.

This paper investigates, over 2007.01-2016.06, the determinants of six euro area sovereign bond yield spreads through original Panel-GARCH models that incorporate key features of volatility dynamics, such as extreme persistence, asymmetry and risk premia effects.Overall, EMU sovereign bond yield spreads are markedly geared by differences in creditworthiness and liquidity and also tend to reflect economic conditions and agents' risk appetite. Moreover, we find significant and quite persistent conditional volatility, and there is evidence that higher yield spreads become less predictable, although the presence of asymmetric effects on the volatility process seems negligible. Definitely, these results have important policy implications.