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Long-Run Movement and Predictability of Bond Spread for BRICS and PIIGS: The Role of Economic, Financial and Political Risks

Nikolai Sheung-Chi Chow, Rangan Gupta, Tahir Suleman () and Wing-Keung Wong

No 201773, Working Papers from University of Pretoria, Department of Economics

Abstract: This study bridges the gap in the literature to examine co-movement and predictability of Bond Spread of BRICS and PIIGS with respect to political risk (PR), financial risk (FR), and economic risk (ER). Our cointegration results conclude that there is strong long run co-movement between the various risks and bond spread for both BRICS and PIIGS. However, both linear and nonlinear Granger causality tests show that not all risks strongly predict bond spread for both BRICS and PIIGS. Our linear Granger causality findings imply that PR is the most important risk in predicting bond spread, followed by ER in both BRICS and in PIIGS, while FR is only weakly useful in predicting bond spread in BRICS but not in PIIGS. Our nonlinear individual causality results infer that ER is the most important risk in predicting bond spread, followed by FR, and PR. In this paper, we make a conjecture that linear and nonlinear causality are independent and our findings support this, and thus, we recommend academics and practitioners conduct both linear and nonlinear causality analysis in their work. The outcomes of this paper are useful for portfolio managers, investors in fixed income market and government agencies.

Keywords: Country Risk; Bond Spread; Linear and Nonlinear Granger Causality (search for similar items in EconPapers)
JEL-codes: C33 C58 G10 G24 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017-10
New Economics Papers: this item is included in nep-cis, nep-cta and nep-sea
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Journal Article: Long-Run Movement and Predictability of Bond Spread for BRICS and PIIGS: The Role of Economic, Financial and Political Risks (2019) Downloads
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