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Analysis of the evolution of sovereign bond yields by wavelet techniques

Author

Listed:
  • David Chinarro

    (San Jorge University, Spain)

  • Eduardo Martínez

    (La Laguna University, Spain)

  • Simón J. Sosvilla

    (Complutense University, Spain)

Abstract

The term “wavelets” covers a set of resources from the mathematical analysis that has proven their efficiency in system identification on areas such as hydrology, geology, glaciology, climatology and energy resources optimization. The methodology undergone on systems engineering could be extrapolated to everything conceptualized as “complex system” whatever its nature be. The wavelet techniques provide the description of non-stationary components and the evolution of macroeconomic variables in the frequency domain. The identification of predominant frequential scales and transient effects in time series highlights the multiresolutional analysis that would be more difficult to treat with traditional methods of econometrics. A review of the literature will show the potential problems that can be solved with these techniques, including prediction of benefits calculated on the evolution of the risk premium of a country, the extraction of symmetric macroeconomic shocks in country clusters, or detection of transient effects on the mutual influence of sovereign bonds between pairs of countries, among others. The dissertation will culminate in specific applications that show the power of wavelet techniques in identifying possible determinants and correlation of the evolution of sovereign bond yields in the euro area countries.

Suggested Citation

  • David Chinarro & Eduardo Martínez & Simón J. Sosvilla, 2015. "Analysis of the evolution of sovereign bond yields by wavelet techniques," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 38(108), pages 152-162, Septiembr.
  • Handle: RePEc:cud:journl:v:38:y:2015:i:108:p:152-162
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    Keywords

    Sovereign bond; Wavelet; Coherence; Entropy; Time series; Correlation; Comovement;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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