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Volatility in EMU sovereign bond yields: permanent and transitory components

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  • Sim�n Sosvilla-Rivero
  • Amalia Morales-Zumaquero

Abstract

This article 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 of daily yields for 11 EMU countries (EMU-11), during the period 2001--2010. In a first step, we decompose volatility in permanent and transitory components using Engel and Lee's (1999) Component-Generalized Autoregressive Conditional Heteroscedasticity (C-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 closely 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.

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File URL: http://hdl.handle.net/10.1080/09603107.2012.661397
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 22 (2012)
Issue (Month): 17 (September)
Pages: 1453-1464

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Handle: RePEc:taf:apfiec:v:22:y:2012:i:17:p:1453-1464

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Cited by:
  1. Antonakakis, Nikolaos & Vergos, Konstantinos, 2012. "Sovereign Bond Yield Spillovers in the Euro Zone During the Financial and Debt Crisis," MPRA Paper 43284, University Library of Munich, Germany.

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