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Volatility in EMU sovereign bond yields: Permanent and transitory components

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  • Simón Sosvilla-Rivero

    ()
    (Departmento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid)

  • Amalia Morales-Zumaquero

    ()
    (Departamento de Teoría e Historia Económica, Facultad de Ciencias Económicas y Empresariales, Universidad de Málaga)

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 support 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://www.aeefi.com/RePEc/pdf/defi11-03.pdf
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Bibliographic Info

Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 11-03.

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Length: 36 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:aee:wpaper:1103

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Related research

Keywords: Conditional variance; Component model; Cluster analysis; Sovereign bond yields; Economic and Monetary Union;

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Cited by:
  1. Antonakakis, Nikolaos & Vergos, Konstantinos, 2013. "Sovereign bond yield spillovers in the Euro zone during the financial and debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 258-272.

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