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Short and Long-run Behaviour of Long-term Sovereign Bond Yields

  • António Afonso
  • Christophe Rault

This study assesses the short and long-run behaviour of long-term sovereign bond yields in OECD countries, for the period 1973-2008. We employ a dynamic panel approach to reflect financial and economic integration, and to increase the performance and accuracy of the tests. Given the existence of cross-country dependence regarding sovereign yields and its determinants, we resort to simulation and bootstrap methods for the analysis. Results based on the Common Correlated Effect estimator of Pesaran (2006) and on Panel Error Correction Models to sort out short- and long-run fiscal developments show that in addition to common movements in sovereign yields, investors also consider country differences arising from specific factors (inflation, budgetary and current account imbalances, real effective exchange rates, and liquidity).

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-11/cesifo1_wp3249.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3249.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3249
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  3. António Afonso & Pedro Gomes & Philipp Rother, 2006. "Ordered Response Models for Sovereign Debt Ratings," Working Papers Department of Economics 2006/34, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
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  17. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 191-240, 04.
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  23. Afonso, António & Rault, Christophe, 2008. "Budgetary and external imbalances relationship: a panel data diagnostic," Working Paper Series 0961, European Central Bank.
  24. Coakley, Jerry & Fuertes, Ana-Maria & Smith, Ron, 2006. "Unobserved heterogeneity in panel time series models," Computational Statistics & Data Analysis, Elsevier, vol. 50(9), pages 2361-2380, May.
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  28. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
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