Forecasting Local Currency Bond Risk Premia of Emerging Markets: The Role of Cross-Country Macro-Financial Linkages

Oguzhan Cepni, Rangan Gupta, I. Ethem Guney () and M. Hasan Yilmaz ()
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I. Ethem Guney: Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050 Ulus, Altndag, Ankara, Turkey
M. Hasan Yilmaz: Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050 Ulus, Altndag, Ankara, Turkey

No 201957, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we forecast local currency debt of five major emerging market countries (Brazil, Indonesia, Mexico, South Africa, and Turkey) over the period of January 2010 to January 2019 (with an in-sample: March 2005 to December 2018). We exploit information from a large set of economic and financial time series to assess the importance of not only “own-country” factors (derived from principal component and partial least squares approach), but also create “global” predictors by combining the country-specific variables across the five emerging economies. We find that while information on own-country factors can outperform the historical average model, global factors tend to produce not only greater statistical and economic gains, but also enhances market timing ability of investors, especially when we use the target-variable (bond premium) approach under the partial least squares method to extract our factors. Our results have important implications for not only fund managers, but also policymakers.

Keywords: Bond risk premia; Emerging markets; Factor extraction methods; Out-of-sample forecasting (search for similar items in EconPapers)
JEL-codes: C22 C53 C55 G12 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2019-07
New Economics Papers: this item is included in nep-fmk, nep-for and nep-sea
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Journal Article: Forecasting local currency bond risk premia of emerging markets: The role of cross‐country macrofinancial linkages (2020)
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