Volatility Spillover Across Sovereign Bond Markets Between African, Emerging and USA Economies

Temesgen Woldamanuel Wajebo

doi:10.2478/eb-2022-0010

Volatility Spillover Across Sovereign Bond Markets Between African, Emerging and USA Economies

Authors

Temesgen Woldamanuel Wajebo Addis Ababa University https://orcid.org/0000-0003-4050-4097

DOI:

https://doi.org/10.2478/eb-2022-0010

Keywords:

Emerging bond return, sovereign bond markets, US stock market return, volatility spillover

Abstract

This study attempted to examine the volatility spillover between the sovereign bond returns of South Africa and Ghana and the emerging market bond return, USA stock market return and the world long term interest rate using weekly data in the period of 2014–2022. The research used dynamic and constant conditional correlation generalized auto-regressive conditional Heteroskedasticsticity models. The result showed that the volatility of long-term world bond interest rate and USA stock market return affected the Ghana sovereign bond return positively and negatively, respectively. Similarly, the volatility of emerging market bond return and long-term world interest rate affected the South African sovereign bond return positively and negatively, respectively. Thus, policy intervention is needed to contain the negative impact of stock market and long-term world interest rates.

References

Adjasi, C. K., & Biekpe, N. B. (2006). Cointegration and dynamic causal links amongst African stock markets. Investment Management and Financial Innovations, 3(4), 102–119. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/1442/imfi_en_2006_04_Adjasi.pdf

Allen, K. (2018, February 23). African debt markets thrive as investors hunt for yield. Financial Times. https://www.ft.com/content/6e71b16a-17df-11e8-9e9c-25c814761640

Arteta, C., & Hale, G. (2008). Sovereign debt crises and credit to the private sector. Journal of International Economics, 74(1), 53–69. https://doi.org/10.1016/j.jinteco.2007.05.008

Azis, I. J., Mitra, S., Baluga, A., & Dime, R. (2013). The threat of financial contagion to emerging Asia’s local bond markets: Spillovers from global crises (No. 106). ADB Working Paper Series on Regional Economic Integration. https://www.adb.org/publications/threat-financial-contagion-emerging-asias-local-bond-markets-spillovers-global-crises

Belke, A., & Volz, U. (2018). Capital flows to emerging market and developing economies: Global liquidity and uncertainty versus country-specific pull factors (IDOS Discussion Papers 23/2018). German Institute of Development and Sustainability (IDOS). https://ideas.repec.org/p/zbw/diedps/232018.html

Bollerslev, T. (1990). Modelling the coherence in short-run nominal exchange rates: a multivariate generalized ARCH model. The review of economics and statistics, 498–505. https://www.jstor.org/stable/2109358

Claeys, P., & Vasicek, B. (2012). Measuring sovereign bond spillover in Europe and the impact of rating news (AQR12/09). AQR–Working Papers. https://econpapers.repec.org/paper/aqrwpaper/201209.htm

Diebold, F. X., & Yilmaz, K. (2009). Measuring financial asset return and volatility spillovers, with application to global equity markets. The Economic Journal, 119(534), 158–171. https://doi.org/10.1111/j.1468-0297.2008.02208.x

Dittmar, R. F., & Yuan, K. (2008). Do sovereign bonds benefit corporate bonds in emerging markets? The Review of Financial Studies, 21(5), 1983–2014. http://www.jstor.org/stable/40056875

Emenike, K. O. (2018). Exchange rate volatility in West African countries: is there a shred of Spillover?. International Journal of Emerging Markets, 13(6), 1457–1474. https://doi.org/10.1108/IJoEM-08-2017-0312

Emenike, K. O. (2022). How does sovereign bond volatility interact between African countries? Journal of Derivatives and Quantitative Studies: 선물연구, 30(4), 246–259. https://doi.org/10.1108/JDQS-06-2021-0015

Engle, R. F., & Sheppard, K. (2001). Theoretical and empirical properties of dynamic conditional correlation multivariate GARCH (Working paper 8554). National Bureau of Economic Research. https://doi.org/10.3386/w8554

Engle, R. F. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics, 20(3), 339–350. https://doi.org/10.1198/073500102288618487

Engle, R. F., & Kroner, K. F. (1995). Multivariate simultaneous generalized ARCH. Econometric theory, 11(1), 122–150. https://doi.org/10.1017/S0266466600009063

Fabella, R., & Madhur, S. (2003). Bond market development in East Asia: Issues and challenges (ERD working paper series no. 35). Asian Development Bank. chrome -extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.adb.org/sites/default/files/publication/28182/wp035.pdf

Francq, C., & Zakoïan, J. M. (2016). Estimating multivariate volatility models equation by equation. Journal of the Royal Statistical Society: Series B (Statistical Methodology), 78(3), 613–635. https://doi.org/10.1111/rssb.12126

Hooker, M. A. (2004). Macroeconomic factors and emerging market equity returns: a Bayesian model selection approach. Emerging Market Review, 5(4), 379–387. https://doi.org/10.1016/j.ememar.2004.09.001

Jahjah, S., Wei, B., & Yue, V. Z. (2013). Exchange rate policy and sovereign bond spreads in developing countries. Journal of Money, Credit and Banking, 45(7), 1275–1300. https://doi.org/10.1111/jmcb.12052

Jeantheau, T. (1998). Strong consistency of estimators for multivariate ARCH models. Econometric theory, 14(1), 70–86. https://www.jstor.org/stable/3532977

Kletzer, K. M. (2005). Sovereign debt, volatility, and insurance (Working paper 2006-05). Federal Reserve Bank of San Francisco. http://www.frbsf.org/publications/economics/papers/2006/wp06-05bk.pdf

Maysami, R. C., & Koh, T. S. (2000). A vector error correction model of the Singapore stock market. International Review of Economics & Finance, 9(1), 79–96. https://doi.org/10.1016/S1059-0560(99)00042-8

Morsy, H., & Moustafa, E. (2020). Mispricing of sovereign risk and investor herding in African debt markets (Working paper 331). Abidjan Côte d’Ivoire: African Development Bank. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.afdb.org/sites/default/files/documents/publications/wps_no_331_mispricing_of_sovereign_risk_and_investor_herding_in_african_debt_markets.pdf

Rahman, A. R., Sidek, N. R. M. & Tafri, F. H. (2009). Macroeconomic determinants of Malaysian stock market. African Journal of Business Management, 3(3), 95–106. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://academicjournals.org/article/article1380530324_Rahman%20et%20al.pdf

Tsang, A., Yiu, M. S., & Nguyen, H. T. (2021). Spillover across sovereign bond markets between the US and ASEAN4 economies. Journal of Asian Economics, 76, Article 101343. https://doi.org/10.1016/j.asieco.2021.101343

Tsay, R. S. (2005). Analysis of financial time series. John Wiley & Sons.

Tse, Y. K., & Tsui, A. K. C. (2002). A multivariate generalized autoregressive conditional heteroscedasticity model with time-varying correlations. Journal of Business & Economic Statistics, 20(3), 351–362. https://doi.org/10.1198/073500102288618496

te Velde, D. W. (2014). Sovereign bonds in sub-Saharan Africa. Good for Growth or Ahead of Time? chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://cdn.odi.org/media/documents/8883.pdf

Vellos, R. (2015). Sub-Saharan Africa’s sovereign bond issuance boom. World Bank. https://blogs.worldbank.org/opendata/sub-saharan-africa-s-sovereign-bond-issuance-boom

Vizek, M. (2019). The sovereign bond markets return and volatility spillovers. Ekonomska misao i praksa, 2, 597–610. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://hrcak.srce.hr/file/335137

World Bank. (2021). DEBT Report 2022. [Unpublished manuscript]