Economic volatility and sovereign yields’ determinants

A time-varying approach

António Afonso, João Tovar Jalles

Research output: Contribution to journalArticle

Abstract

Using monthly data for 10 euro area countries between 1999:01 and 2015:12, we take a new three-step methodological approach: first, we inspect the key determinants of 10-year government bond yield spreads; second, we compute country-specific time-varying coefficient models of spreads’ determinants; third, we use these estimates as explanatory variables in panel regressions using output volatility as the dependent variable. We find that better fiscal positions or higher-than-expected economic growth prospects reduce the yield spreads, while increases in the VIX, bid-ask spread, debt-to-GDP ratio or real effective exchange rate appreciation increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the global financial crisis. Finally, for the case of the budget balance and real growth (bid-ask spread, debt-to-GDP ratio, real effective exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) the economic volatility.

Original languageEnglish
Pages (from-to)427-451
JournalEmpirical Economics
Volume58
Issue number2
DOIs
Publication statusPublished - Feb 2020

Fingerprint

Volatility
Time-varying
Determinant
Economics
determinants
indebtedness
government bonds
economics
Euro
financial crisis
Exchange rate
budget
economic growth
regression
Time-varying Coefficients
Varying Coefficient Model
Financial Crisis
time
Yield spread
Economic volatility

Keywords

  • Bond spreads
  • Cross-sectional dependence
  • Errors-in-variables
  • Fiscal policy
  • Instrumental variables
  • Time-varying coefficients
  • Volatility

Cite this

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abstract = "Using monthly data for 10 euro area countries between 1999:01 and 2015:12, we take a new three-step methodological approach: first, we inspect the key determinants of 10-year government bond yield spreads; second, we compute country-specific time-varying coefficient models of spreads’ determinants; third, we use these estimates as explanatory variables in panel regressions using output volatility as the dependent variable. We find that better fiscal positions or higher-than-expected economic growth prospects reduce the yield spreads, while increases in the VIX, bid-ask spread, debt-to-GDP ratio or real effective exchange rate appreciation increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the global financial crisis. Finally, for the case of the budget balance and real growth (bid-ask spread, debt-to-GDP ratio, real effective exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) the economic volatility.",
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Economic volatility and sovereign yields’ determinants : A time-varying approach. / Afonso, António; Jalles, João Tovar.

In: Empirical Economics, Vol. 58, No. 2, 02.2020, p. 427-451.

Research output: Contribution to journalArticle

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