Volatility in EMU Sovereign Bond Yields: Permanent and Transitory Components

International Economics & Finance DEFI Working Paper No. 11-03

36 Pages Posted: 9 May 2011

See all articles by Simon Sosvilla-Rivero

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Amalia Morales-Zumaquero

University of Malaga - Departamento de Teoria e Historia Economica

Date Written: April 2011

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.

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

JEL Classification: C32, F33, G12, G13

Suggested Citation

Sosvilla-Rivero, Simon and Morales-Zumaquero, Amalia, Volatility in EMU Sovereign Bond Yields: Permanent and Transitory Components (April 2011). International Economics & Finance DEFI Working Paper No. 11-03 . Available at SSRN: https://ssrn.com/abstract=1829926 or http://dx.doi.org/10.2139/ssrn.1829926

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Amalia Morales-Zumaquero

University of Malaga - Departamento de Teoria e Historia Economica ( email )

Malaga, Málaga 29004
Spain

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