Do Local and Global Factors Impact the Emerging Markets’s Sovereign Yield Curves? Evidence from a Data-Rich Environment

25 Pages Posted: 9 Dec 2019

See all articles by Oguzhan Cepni

Oguzhan Cepni

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Ibrahim Guney

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Doruk Kucuksarac

Central Bank of Turkey

Muhammed Hasan Yilmaz

Government of the Republic of Turkey - Central Bank of the Republic of Turkey; University of St Andrews School of Management

Date Written: November 22, 2019

Abstract

This paper investigates the relationship between the yield curve and macroeconomic factors for ten emerging sovereign bond markets using the sample from January 2006 to April 2019. To this end, the diffusion indices obtained under four categories (global variables, inflation, domestic financial variables, and economic activity) are incorporated by estimating dynamic panel data regressions together with the yield curve factors. Besides, in order to capture dynamic interaction between the yield curve and macroeconomic/financial factors, a panel VAR analysis based on the system GMM approach is utilized. Empirical results suggest that the level factor responds to shocks originated from inflation, domestic financial variables, and global variables. Furthermore, the slope factor is affected by shocks in global variables, and the curvature factor appears to be influenced by domestic financial variables. We also show that macroeconomic/financial factors captures significant predictive information over yield curve factors by running individual country factor-augmented predictive regressions and variable selection algorithms such as ridge regression, LASSO, and Elastic Net. Our findings have important implications for policymakers and fund managers by explaining the underlying forces of movements in the yield curve and forecasting accurately dynamics of yield curve factors.

Keywords: Yield Curve, Macroeconomic Factors, Nelson Siegel Model, Panel VAR, Forecasting, Variable Selection

JEL Classification: C1, C5, F2, F3, F4, G1

Suggested Citation

Cepni, Oguzhan and Guney, Ibrahim and Kucuksarac, Doruk and Yilmaz, Muhammed Hasan, Do Local and Global Factors Impact the Emerging Markets’s Sovereign Yield Curves? Evidence from a Data-Rich Environment (November 22, 2019). Available at SSRN: https://ssrn.com/abstract=3491730 or http://dx.doi.org/10.2139/ssrn.3491730

Oguzhan Cepni (Contact Author)

Government of the Republic of Turkey - Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

Ibrahim Guney

Government of the Republic of Turkey - Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

Doruk Kucuksarac

Central Bank of Turkey ( email )

Ankara
Turkey

Muhammed Hasan Yilmaz

Government of the Republic of Turkey - Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

University of St Andrews School of Management ( email )

The Gateway North Haugh
St Andrews, KY16 9RJ
United Kingdom

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