Examining volatility and spillover effects between markets for sovereign bonds of African countries and the world’s long term interest rate

Negash Debalke

MPRA Paper from University Library of Munich, Germany

Abstract: The study sets out to examine the existence of volatility and spillover effects between sovereign bond returns of South Africa and Ethiopia and the world’s long term interest rate using weekly data in the period of 2014–2022. An MGARCH-DCC model is estimated to analyze the direction and strength of sovereign bonds’ volatility interaction. The result indicated that volatility from the long-term world interest rate and South Africa’s sovereign bond return affected the Ethiopian sovereign bond return negatively and positively, respectively. Then, it shows the existence of a bidirectional return spillover between Ethiopia’s and South Africa’s sovereign bond markets, and a unidirectional transmission from the US’s long-term Treasury bond market to Ethiopia’s sovereign bond market. Besides, the sum of ARCH and GARCH terms is very close to unity for both Ethiopia and South Africa, implying that both markets display high persistence in their volatilities. On the other hand, Ethiopia’s and South Africa’s sovereign bonds have weak or insignificant correlation with the world’s long term interest rate. Besides, volatility in both markets is significantly affected by their own respective shocks and volatilities. The findings suggest that African financial policy makers should consider their own economies realities and specific reactions to volatility and spillover effects from the world’s long-term interest rate. That means contextual policy workout is required to contain the negative impacts of the world’s long-term world interest rates. Finally, the strong correlation between Ethiopia’s and South Africa’s sovereign bond market suggests the need to maintain financial stability through monitoring of both national and regional monetary policies.

Keywords: Africa; volatility; spillover; sovereign bond; long term interest rate; correlation. (search for similar items in EconPapers)
JEL-codes: E44 (search for similar items in EconPapers)
Date: 2023-03-01
New Economics Papers: this item is included in nep-afr and nep-mfd
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Citations: View citations in EconPapers (1)

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