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Volatility in EMU sovereign bond yields: permanent and transitory components

Sosvilla Rivero, Simón and Morales-Zumaquero, Amalia (2011) Volatility in EMU sovereign bond yields: permanent and transitory components. [ Working Paper; nº 06/11, ]

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Abstract

This paper explores the evolving relationship in the volatility of sovereign yields in the European Economic
and Monetary Union (EMU). To that end, we examine the behaviour for daily yields for 11 EMU countries
(EMU-11), during the 2001-2010 period. In a first step, we decompose volatility in permanent and transitory
components using Engel and Lee (1999)´s component-GARCH model. Results suggest that transitory shifts
in debt market sentiment tend to be less important determinants of bond-yield volatility than shocks to the
underlying fundamentals. In a second step, we develop a correlation and causality analysis that indicates the
existence of two different groups of countries closed linked: core EMU countries and peripheral EMU countries.
Finally, in a third step, we make a cluster analysis that further supports our results regarding the existence
of two different groups of countries, with different positions regarding the stability of public finance


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Conditional variance, Component model, Cluster analysis, Sovereign bond yields, Economic and Monetary Union
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Stock exchanges
Social sciences > Economics > Economic integration
Social sciences > Economics > Regional economics
Series Name:Working Paper
Volume:
Number:06/11
ID Code:12896
References:

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Deposited On:05 Jul 2011 09:59
Last Modified:06 Feb 2014 09:35

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