What Explains the Volatility in Pakistan’s Sovereign Bond Yields?

Mohsin Waheed and Zulfiqar Hyder (zulfiqar.hyder@sbp.org.pk)
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Zulfiqar Hyder: State Bank of Pakistan

No 112, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: In this paper, we determine the significant domestic and external drivers of volatility in Pakistan’s sovereign bond yield-to-maturity (YTM) across different tenors. We use a class of volatility models (GARCH, TGARCH, and EGARCH) on daily data starting from January 2019 to October 2022. We find that, in addition to domestic macroeconomic fundamentals, political factors also contribute substantially to the volatility in bond yields. Additionally, we also argue that foreign investors’ risk perception is susceptible to exchange rate depreciation, import cover, and sovereign ratings. On the external side, we find that the general riskiness perception of emerging market bonds as measured by Emerging Market Bond Index Spreads significantly explains the volatility of Pakistan’s sovereign bonds.

Keywords: Volatility; Sovereign bonds; Yield; Eurobond; Sukuk; Spreads (search for similar items in EconPapers)
JEL-codes: B26 C01 C12 C32 C58 G12 G24 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2023-04
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