Excess volatility pursuit in autoregressive GARCH model based panel data analysis at country level: BRICS context

PurposeThis particular study examined the government bond price variations in order to determine the presence of excess volatility both at country and panel group level of BRICS countries context.Design/methodology/approachThe study applied the autoregressive GARCH panel model approach proposed by Fakhry and Richter (2015) to evaluate the presence of excess volatility and then examined the diversification benefits. Further, the use of discrete wavelet transformation (DWT) has added the advantage to observe volatility across bonds along with potential diversification benefits by retaining information from the time and frequency domain perspective for both the maturities.FindingsThe main finding indicates that the excess volatility is present in BRICS countries at individual level i.e. in the case of Russia, India and China. However, the 10-year bond showing a less volatility compared to 5-year bond with the possibility of reaping out the benefits of diversification with international portfolio of sovereign bonds.Practical implicationsThe main implication of the research is related to the non-perseverance of EMH as far sovereign bonds of BRICS countries are concerned as the results indicate presence of excess volatility in the 5-year and 10-year bond markets. However, the implicit behavior of 5-year bond could benefit the active fund managers and investors by taking an advantage of a reducing systemic risk through short-medium term investments.Originality/valueThis study contributes not only to the existing studies of similar nature by examining the excess volatility in bond markets but also taking account of co-moment of distinct maturities to confirm possible international diversification benefits for BRICS countries context.

On sovereign bonds and marijuana: Comparing supremacy limits in the US and the EU

Against the background of the PSPP judgement, the article conducts an under-researched comparison of the German Court's recent judgement with incidents of defiance from American states’ legislatures. Particularly, it highlights the example of marijuana laws in the US where a handful of states managed to legislate de facto governing norms contrary to the federal ones. The article then examines the German Court's last decision on sovereign bonds to compare the underlying factors that facilitates European judicial defiance with those contributing to occasional state legislator resistance in the US. Comparison to the highly centralized US shows that defiance of supremacy cannot be eliminated, but its conducive factors can be controlled to ensure a functioning constitutional system. To do so, attention must be paid to popular, fiscal and political factors, rather than to exclusively legalistic ones.

Yield Curve And Its Impact On Discount Rates In The Financial Evaluation Of A Project- Application case in Argentina

This paper introduces some theories that attempt to explain the behavior of the “Temporary Structure of Interest Rates” (TSIR), which observe the correlation between various variables of the economy and projected interest rates, which will later serve as a reference for the determination of the discount rates of the projected flows in the economic-financial evaluation of a productive investment project. The empirical analysis focuses on evaluating the required returns on Sovereign Bonds issued in the Argentine Republic in dollar currency, which determine a yield curve that shows high levels of projected inflation expectations, such as high levels in the definition of rates discount of projected flows. Resumen El presente trabajo introduce algunas teorías que intentan explicar el comportamiento de la “Estructura Temporal de las Tasas de Interés” (ETTI), que observan la correlación entre diversas variables de la economía y las tasas de interés proyectadas, que servirá luego como referencia para la determinación de las tasas de descuentos de los flujos proyectados en la evaluación económico financiero de un proyecto de inversión productiva. El análisis empírico se centra en evaluar los rendimientos exigidos en los Bonos soberanos emitidos en la República Argentina en moneda dólar, que determinan una curva de rendimientos que pone en evidencia niveles altos de expectativas de inflación proyectada, como niveles altos en la definición de las tasas de descuento de los flujos proyectados.

Coming to Terms: The Politics of Sovereign Bond Denomination

Governments interact strategically with sovereign bond market creditors: they make choices not only about how often and how much to borrow, but also under what terms. The denomination of debt, in domestic or foreign currency, is a critical part of these terms. The “original sin” logic has long predicted that creditors have little appetite for developing-country government debt issued in domestic currency. Our novel data, including bond issues by 131 countries in 240,000 primary market transactions between 1990 and 2016, suggest otherwise. Domestic-denominated bonds have come to dominate the market, although domestic-currency issuance often is accompanied by shorter bond maturities. We argue that ideologically rooted policy preferences play an important role in this unexpected trend in denomination. All else equal, right governments choose foreign denomination as a means of mitigating currency risk and thus minimizing borrowing costs. In contrast, left governments opt for the flexibility of domestic denomination, and they are better able to act on their preferences in the presence of risk-mitigating monetary institutions and macroeconomic stability. We find support for our argument that partisanship has a robust and enduring relationship with denomination outcomes, even in a marketplace in which domestic-denominated developing-country sovereign bonds have become the norm.

El Salvador bitcoin experiment comes with risks

Significance The government hopes to encourage the cryptocurrency’s use for domestic and international transactions, with the aim of boosting financial inclusion. However, it has been criticised because there are low levels of access to digital finance among the population, and sceptics dismiss it as a gimmick. Further criticism centres on concerns around financial crime. Impacts Businesses accepting bitcoin will need to upgrade their IT infrastructure and security, imposing transition costs. State investment in ICT infrastructure will also be required to enable broad uptake of digital finance options. The government is set to launch new sovereign bonds, which it hopes will supplement IMF funding.

The effect of Eurosystem asset purchase programmes on euro area sovereign bond yields during the COVID-19 pandemic

We investigate the effect of Eurosystem Asset Purchase Programmes (APP) on the monthly yields of 10-year sovereign bonds for 11 euro area sovereigns during January-December 2020. The analysis is based on time-varying coefficient methods applied to monthly panel data covering the period 2004m09 to 2020m12. During 2020 APP contributed to an average decline in yields estimated in the range of 58-76 bps. In December 2020 the effect per EUR trillion ranged between 34 bps in Germany and 159 bps in Greece. Stronger effects generally display diminishing returns. Our findings suggest that a sharp decline in the size of the APP in the aftermath of the COVID-19 crisis could lead to very sharp increases in bond yields, particularly in peripheral countries. The analysis additionally reveals a differential response to global risks between core and peripheral countries, with the former enjoying safe-haven benefits. Markets’ perceptions of risk are found to be significantly affected by credit ratings, which is in line with recent evidence based on constant parameter methods.

Global Equity Correlation in International Markets

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks. This paper was accepted by Karl Diether, finance.

Herd behavior of pension funds in sovereign bond investments

This study investigates herd behavior exhibited by pension funds in the sovereign bond market before, during and after the European debt crisis. It uses unique monthly data on sovereign bond holdings of pension funds and transactions between December 2008 and December 2014. The dataset covers 67 large Dutch pension funds that invest in bonds from 109 countries. We find evidence of intensive herd behavior of Dutch pension funds in sovereign bonds. We also distinguish between European countries which suffer from the European debt crisis, such as Cyprus, Greece, Ireland, Italy, Portugal and Spain, and those that have not. We find high sell herding and low buy herding for the crisis countries during the European debt crisis, whereas in the non-crisis period their herd behavior does not differ substantially from that in non-crisis countries. When we control for institutional, macroeconomic, financial market and pension fund factors, sell herding in crisis countries is still significantly higher. However, we find no evidence of destabilizing behavior with respect to bonds of crisis countries during the European debt crisis.

The Relevance of Liquidity and Country Risk to Euro-Denominated Bonds and the Influence of ECB Monetary Policy

This paper investigates the main determinants of euro denominated corporate bond yields, then analyses the “country effect” by focusing on economic reasons for the strong link between country and corporate yields. It also examines the potential impact of monetary policy of the European Central Bank (ECB) on corporate bond yields on the days of Governing Council meetings. A sample of 1,762 corporate euro-country bonds is analyzed for the period May 2005 – January 2012 using OLS panel data. The economic reason for the strong link between countries and corporate yields is investigated up to 2017. We find that idiosyncratic liquidity and risk have a crucial impact on bond yields, but yields are also strongly influenced by the risk of the corresponding sovereign bonds. Finally, we show that unexpectedness component of ECB policy also exerts a strong short-term effect.