Volatility in EMU sovereign bond yields: Permanent and transitory components

Simon Sosvilla-Rivero and Amalia Morales-Zumaquero ()
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Amalia Morales-Zumaquero: Departamento de Teoría e Historia Económica, Facultad de Ciencias Económicas y Empresariales, Universidad de Málaga

No 11-03, Working Papers from Asociación Española de Economía y Finanzas Internacionales

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 support 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 (search for similar items in EconPapers)
JEL-codes: C32 F33 G12 G13 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-04
New Economics Papers: this item is included in nep-eec and nep-fmk
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Volatility in EMU sovereign bond yields: permanent and transitory components (2012)
Working Paper: Volatility in EMU sovereign bond yields: Permanent and transitory components (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:aee:wpaper:1103

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