Bond Yield Compression in the Countries Converging to the Euro

Lucjan Orlowski and Kirsten Lommatzsch ()

No wp799, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.

Keywords: term spread; term premium; yield compression; monetary convergence; new Member States; EMU; conditional volatility; asymmetric GARCH models (search for similar items in EconPapers)
JEL-codes: E43 E44 F36 (search for similar items in EconPapers)
Pages: pages
Date: 2005-10-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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