Economic Volatility and Sovereign Yields' Determinants: A Time-Varying Approach

ISEG Economics Department Working Paper No. WP 04/2016/DE/UECE

24 Pages Posted: 8 Jan 2016

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

João Tovar Jalles

University of Lisbon; International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Date Written: December 2015

Abstract

Using quarterly data for 10 Euro Area countries we assess the determinants of government bond yield spreads; compute bivariate time-varying coefficient models of each determinant; and use these estimates to explain economic volatility. We find that better fiscal positions or higher than expected growth prospects reduce the yield spreads, while increases in the VIX, and bid ask, debt-to-GDP ratio or real effective exchange rate 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 GDP growth (bid ask spread, debt-to-GDP ratio, real effect exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) is economic volatility.

Keywords: volatility, fiscal policy, bond spreads, weighted least squares, time-varying coefficients

JEL Classification: C23, E62, G01, H62

Suggested Citation

Afonso, António and Jalles, João Tovar, Economic Volatility and Sovereign Yields' Determinants: A Time-Varying Approach (December 2015). ISEG Economics Department Working Paper No. WP 04/2016/DE/UECE , Available at SSRN: https://ssrn.com/abstract=2712221

António Afonso (Contact Author)

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
Lisbon, 1248-078
Portugal
+351 21 392 5985 (Phone)
+351 21 396 6407 (Fax)

HOME PAGE: http://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://uece.rc.iseg.ulisboa.pt/

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

João Tovar Jalles

University of Lisbon ( email )

R. Branca Edmée Marques
Dept. Plant Biology
Lisboa, 1600-276
Portugal

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
64
Abstract Views
621
Rank
622,763
PlumX Metrics