Do local and global factors impact the emerging markets' sovereign yield curves? Evidence from a data-rich environment
Abstract
This paper investigates the relation between yield curve and macroeconomic factors for ten emerging sovereign bond markets using the sample from January 2006 to April 2019. To this end, the diffusion indices obtained under four categories (global variables, inflation, domestic financial variables, and economic activity) are incorporated by estimating dynamic panel data regressions together with the yield curve factors. Besides, in order to capture dynamic interaction between yield curve and macroeconomic/financial factors, a panel VAR analysis based on the system GMM approach is utilized. Empirical results suggest that the level factor responds to shocks originated from inflation, domestic financial variables and global variables. Furthermore, the slope factor is affected by shocks in global variables, and the curvature factor appears to be influenced by domestic financial variables. We also show that macroeconomic/financial factors captures significant predictive information over yield curve factors by running individual country factor-augmented predictive regressions and variable selection algorithms such ridge regression, LASSO and Elastic Net. Our findings have important implications for policymakers and fund managers by explaining the underlying forces of movements in the yield curve and forecasting accurately dynamics of yield curve factors.
Citation
Cepni , O , Guney , I E , Kucuksarac , D & Yilmaz , M H 2021 , ' Do local and global factors impact the emerging markets' sovereign yield curves? Evidence from a data-rich environment ' , Journal of Forecasting , vol. Early View . https://doi.org/10.1002/for.2763
Publication
Journal of Forecasting
Status
Peer reviewed
ISSN
0277-6693Type
Journal article
Rights
Copyright © 2021 John Wiley & Sons, Ltd. This work has been made available online in accordance with publisher policies or with permission. Permission for further reuse of this content should be sought from the publisher or the rights holder. This is the author created accepted manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1002/for.2763
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