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

Antonio Afonso and Joao Jalles ()

Empirical Economics, 2020, vol. 58, issue 2, No 2, 427-451

Abstract: Abstract 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 time-varying 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 the VIX, 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.

Keywords: Volatility; Fiscal policy; Bond spreads; Errors-in-variables; Time-varying coefficients; Instrumental variables; Cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: C23 E62 G01 H62 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Economic Volatility and Sovereign Yields’ Determinants: a Time-Varying Approach (2016) Downloads
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DOI: 10.1007/s00181-018-1540-6

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