An Empirical Analysis of the Relationship between US and Colombian Long-Term Sovereign Bond Yields

Abstract

We study two issues: (i) the relationship between interest rates on US and Colombian sovereign debt and (ii) the short-term response of the Colombian long-term bond yield and other asset prices to shocks to the US long-term Treasury rate. We use daily data between 2004 and 2013. Separating the period into three intervals (before, during and after the financial crisis), we consider the first issue with a moving window linear regression, and we address the second by estimating a VARX-MGARCH model. Our findings show that the link between sovereign bond yields has changed over time, and that the short-run responses of local asset prices to foreign financial shocks were qualitatively different in the three periods. The role of US Treasury securities as a safe haven asset during highly volatile periods seems to be at the root of these changes.

Full publication: The Transmission of Unconventional Monetary Policy to the Emerging Markets

Keywords: Long-term bond yields, global financial crisis, emerging markets, moving window linear regression , VARX-MGARCH model

JEL Classification: C30, E43, E58, F42, G15