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Correlation between Maltese and euro area sovereign bond yields

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  • Ellul, Reuben

Abstract

This paper investigates correlation in Malta government stock (MGS) yields and assesses correlation between these yields and those of Malta’s major euro area partners. Correlation coefficients are found to be high, indicating the existence of a long-run relationship in the setting of MGS yields with short-term deviations. The analysis also includes an MGARCH-DCC(1,1) system based on spreads over the German ten-year bond, which are modelled for eleven euro area countries. Dynamic conditional correlations (DCCs) confirm that Maltese ten-year bond yields tend to be broadly insulated from event specific volatility in other countries’ yields. Simple ‘benchmark’ regressions are estimated over the period 2007 – 2016, allowing the comparison of actual ten-year bond yields with composite equation outputs. The benchmarked yields based on euro area bonds track consistently actual MGS yields, while from mid-2015 onwards, MGS yields follow closely a benchmark derived on the basis of underlying economic fundamentals.

Suggested Citation

  • Ellul, Reuben, 2017. "Correlation between Maltese and euro area sovereign bond yields," MPRA Paper 80795, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:80795
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    References listed on IDEAS

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    1. Hallerberg, Mark & Wolff, Guntram B., 2006. "Fiscal institutions, fiscal policy and sovereign risk premia," Discussion Paper Series 1: Economic Studies 2006,35, Deutsche Bundesbank.
    2. Ellul, Reuben, 2015. "Analysing correlation between the MSE index and global stock markets," MPRA Paper 72464, University Library of Munich, Germany.
    3. Ioana Alexopoulou & Irina Bunda & Annalisa Ferrando, 2010. "Determinants of Government Bond Spreads in New EU Countries," Eastern European Economics, Taylor & Francis Journals, vol. 48(5), pages 5-37, September.
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    13. Sebastian Missio & Sebastian Watzka, 2011. "Financial Contagion and the European Debt Crisis," CESifo Working Paper Series 3554, CESifo Group Munich.
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    More about this item

    Keywords

    correlation; sovereign bond yields; MGARCH-DCC; Malta;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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