From bond yield to macroeconomic instability: A parsimonious affine model
Maria Cristina Recchioni and
Gabriele Tedeschi ()
European Journal of Operational Research, 2017, vol. 262, issue 3, 1116-1135
We present a hybrid Heston model with a common stochastic volatility to describe government bond yield dynamics. The model is analytically tractable and, therefore, can be efficiently estimated using the maximum likelihood approach and a specific expansion in order to cope with the curse of dimensionality. 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. We also investigate the potential of this indicator on U.S. data (treasury bills).
Keywords: Finance; Stochastic volatility model; Yield dynamics in the Eurozone; Early warning indicator; Yield forecasting (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:262:y:2017:i:3:p:1116-1135
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