The Impact of the Argentine Default on Volatility Co-Movements in Emerging Bond Markets

45 Pages Posted: 25 Mar 2004

See all articles by Giulio Cifarelli

Giulio Cifarelli

DISEI University of Florence

Giovanna Paladino

IntesaSanpaolo; LUISS Economics Department

Date Written: January 2003

Abstract

This paper analyses the dynamic interrelationship between sovereign bond spreads in ten emerging markets. It investigates the nature of the volatility transmission in secondary bond markets through conditional covariance estimates obtained by orthogonal methods. This approach, which combines PCA with GARCH volatility modelling, filters away idiosyncratic news and focuses on spreads dynamics driven by common factors. We find convincing evidence of co-movements between spread changes; more within than across geographical areas. Conditional covariations increase in periods of turbulence and subsequently subside. The time varying minimum variance artificial portfolios, which are used here for model validation, show that, in spite of systemic risk, international portfolio diversification is still a powerful strategy for risk reduction.

Keywords: Bond yields, O-GARCH, O-EWMA, contagion

JEL Classification: F30, G12, G14, G15

Suggested Citation

Cifarelli, Giulio and Paladino, Giovanna, The Impact of the Argentine Default on Volatility Co-Movements in Emerging Bond Markets (January 2003). Available at SSRN: https://ssrn.com/abstract=504526 or http://dx.doi.org/10.2139/ssrn.504526

Giulio Cifarelli

DISEI University of Florence ( email )

via delle Pandette 9
Florence 50127
Italy

Giovanna Paladino (Contact Author)

IntesaSanpaolo ( email )

Piazza San Carlo
Torino, 10121
Italy

LUISS Economics Department ( email )

Viale di Villa Massimo, 57
Rome, 00161
Italy

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