Economic, statistical and political aspects of sovereign bond markets – SOBOM (CSF)

 

Summary: Developments related to the Eurozone debt crisis clearly demonstrated the inability of the literature to provide a theory and associated empirical models that could explain the past and predict the future sovereign bond yield changes. Therefore in this research we investigated the features of the sovereign bond markets that were either underexplored or the literature offered conflicting findings. We focused specifically on bond markets in all EU member states and the US, and differentiated seven research segments that were mutually interrelated. The first segment applied GARCH-type models and estimated sovereign bond spread volatility and the volatility risk premium. The output of this segment was used in subsequent segments; in the model of spread determinants, volatility spillovers, and capital flight. The second segment was dedicated to the analysis of the statistical properties of sovereign spreads volatility by an application of extreme value theory, self-exciting and Markov switching models. We quantified extremal dependence between spreads and the distribution of  clusters of their extreme movements using the extremogram. Two segments were devoted to the analysis of volatility spillovers across bond markets and time-varying degree of sovereign bond market integration in developed and emerging EU countries. We also analysed political factors that could influence the sovereign bond market and cross-border capital movement. In this segment we coded political variables employed as explanatory variables in the remaining two segments. Hence segment six estimated the model of spread determinants that included a more balanced and detailed representation of market sentiment and volatility, fiscal features, and political factors. Due to the fact that extreme changes in sovereign bond markets induced cross-border reallocation of the capital, in the seventh segment we estimated a capital flight model that included political factors and sovereign spread volatility premium.