From bond yield to macroeconomic instability: The effect of negative interest rates

Maria Recchioni and Gabriele Tedeschi

No 2016/06, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: We present a hybrid Heston model with a local stochastic volatility to describe government bond yield dynamics. The model is analytically tractable and, therefore, can be efficiently estimated using the maximum likelihood approach. Twofold is the model contribution. First, it captures changes in the yield volatility and predict future yield values of Germany, French, Italy and Spain. The result is an early-warning indicator which anticipates phases of instability characterizing the time series investigated. Then, the model describes convergence/divergence phenomena among European government bond yields and explores the countries'reactions to a common monetary policy described through the EONIA interbank rate.

Keywords: Stochastic volatility model; Kolmogorov backward equation; maximum likelihood function; government bond yield forecasting (search for similar items in EconPapers)
JEL-codes: C13 C32 E58 G12 G17 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2016
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:jau:wpaper:2016/06

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