Economic volatility and sovereign yields’ determinants: a time-varying approach

• Autor(a) principal: Afonso, António
• Data de Publicação: 2020
• Outros Autores: Jalles, João Tovar
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.5/25513
• topic: Volatility; Fiscal Policy; Bond Spreads; Errors-in-Variables; Time-Varying Coefficients; Instrumental Variables; Cross-Sectional Dependence

Using monthly data for 10 euro area countries between 1999:01 and 2015:12, we take a new three-step methodological approach: first, we inspect the key determinants of 10-year government bond yield spreads; second, we compute country-specific timevarying coefficient models of spreads’ determinants; third, we use these estimates as explanatory variables in panel regressions using output volatility as the dependent variable.We find that better fiscal positions or higher-than-expected economic growth prospects reduce the yield spreads,while increases in theVIX, bid-ask spread, debt-to- GDP ratio or real effective exchange rate appreciation increase the spreads.Moreover, the responsiveness of the yield spread determinants increased in the run-up to the global financial crisis. Finally, for the case of the budget balance and real growth (bid-ask spread, debt-to-GDP ratio, real effective exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) the economic volatility.