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Volatility in EMU sovereign bond yields: Permanent and transitory components

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  • Simón Sosvilla-Rivero

    ()
    (Universidad Complutense de Madrid. Instituto Complutense de Estudios Internacionales (ICEI))

  • Amalia Morales-Zumaquero

    ()
    (Universidad Complutense de Madrid. Instituto Complutense de Estudios Internacionales (ICEI))

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.

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File URL: http://eprints.ucm.es/12896/1/WP_06-11.pdf
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Bibliographic Info

Paper provided by Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales in its series Working Papers del Instituto Complutense de Estudios Internacionales with number 06-11.

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Length: 26 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ucm:wpaper:06-11

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Related research

Keywords: Conditional variance; Component model; Cluster analysis; Sovereign bond yields; Economic and Monetary Union; Varianza condicional; El modelo de componentes; Análisis de conglomerados; Los rendimientos de los bonos soberanos; Unión Económica y Monetaria.;

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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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