Economic, statistical and political aspects of sovereign bond markets – SOBOM (CSF)

Economic, statistical and political aspects of sovereign bond markets – SOBOM (CSF)

 
Programme: Croatian Science Foundation's Installation Research Projects Programme
Project duration: 36 months; from September 1, 2014 to August 31, 2017
Project manager: Maruška Vizek
Project value: 493.700,00 HRK

Summary: Recent developments related to the Eurozone debt crisis clearly demonstrated the inability of the literature to provide a theory and associated empirical models that can explain the past and predict the future sovereign bond yield changes. Therefore in this research we investigate the features of the sovereign bond markets that are either underexplored or the literature offers conflicting findings. We focus specifically on bond markets in all EU member states and the US, and differentiate seven research segments that are mutually interrelated. First segment applies GARCH-type models and estimates sovereign bond spread volatility and the volatility risk premium. The output of this segment is used in subsequent segments; in the model of spread determinants, volatility spillovers, and capital flight. Second segment is dedicated to the analysis of the statistical properties of sovereign spreads volatility by an application of extreme value theory, self-exciting and Markov switching models. We quantify extremal dependence between spreads and the distribution of  clusters of their extreme movements using the extremogram. Two segments are devoted to the analysis of volatility spillovers across bond markets and time-varying degree of sovereign bond market integration in developed and emerging EU countries. We also analyse political factors that may influence the sovereign bond market and cross-border capital movement. In this segment we code political variables employed as explanatory variables in the remaining two segments. Hence segment six estimates the model of spread determinants that includes a more balanced and detailed representation of market sentiment and volatility, fiscal features, and political factors. Due to the fact that in recent times extreme changes in sovereign bond markets induced cross-border reallocation of the capital, in the seventh segment we estimate a capital flight model that includes political factors and sovereign spread volatility premium.

 

This work has been fully supported by Croatian Science Foundation under the project 1356.
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