Examining volatility and spillover effects between markets for sovereign bonds of African countries and the world’s long term interest rate

Debalke, Negash Mulatu (2023): Examining volatility and spillover effects between markets for sovereign bonds of African countries and the world’s long term interest rate.

Abstract

The study sets out to examine the existence of volatility and spillover effects between sovereign bond returns of South Africa and Ethiopia and the world’s long term interest rate using weekly data in the period of 2014–2022. An MGARCH-DCC model is estimated to analyze the direction and strength of sovereign bonds’ volatility interaction. The result indicated that volatility from the long-term world interest rate and South Africa’s sovereign bond return affected the Ethiopian sovereign bond return negatively and positively, respectively. Then, it shows the existence of a bidirectional return spillover between Ethiopia’s and South Africa’s sovereign bond markets, and a unidirectional transmission from the US’s long-term Treasury bond market to Ethiopia’s sovereign bond market. Besides, the sum of ARCH and GARCH terms is very close to unity for both Ethiopia and South Africa, implying that both markets display high persistence in their volatilities. On the other hand, Ethiopia’s and South Africa’s sovereign bonds have weak or insignificant correlation with the world’s long term interest rate. Besides, volatility in both markets is significantly affected by their own respective shocks and volatilities. The findings suggest that African financial policy makers should consider their own economies realities and specific reactions to volatility and spillover effects from the world’s long-term interest rate. That means contextual policy workout is required to contain the negative impacts of the world’s long-term world interest rates. Finally, the strong correlation between Ethiopia’s and South Africa’s sovereign bond market suggests the need to maintain financial stability through monitoring of both national and regional monetary policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Africa; volatility; spillover; sovereign bond; long term interest rate; correlation.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Abou-Zaid, A. S. (2011). Volatility Spillover Effects in Emerging MENA Stock Markets. Review of Applied Economics Vol. 7, No. 1-2, (January-December 2011).

Albagli, E., Ceballos, L., Claro, S. & Romero, D. (2018). Channels of US Monetary Policy Spillovers to International Bond Markets. BIS Working Papers No 719. JEL classification: E43, G12, G15. Bank for International Settlements (BIS) 2018

Ali, M., Alam, N., & Rizvi, S. A. R. (2020). Coronavirus (COVID-19)—An epidemic or pandemic for financial markets. Journal of Behavioral and Experimental Finance, 27, 100341.

Alkan, B. and Cieck, S. (2020). Spillover effect in financial markets in Turkey. Central Bank Review 20 (2020) 53-64. https://doi.org/10.1016/j.cbrev.2020.02.003

Aslam, F., Ferreira, P., Mughal, K. S., & Bashir, B. (2021). Intraday Volatility Spillovers among European Financial Markets during COVID-19. International Journal of Financial Studies, 9(1), 5.

Bala, D. A. & Takimoto, T. (2017). Stock markets volatility spillovers during financial crises: A DCC-MGARCH with skewed-t density approach. Borsa Istanbul Review 17-1 (2017) 25e48. http://dx.doi.org/10.1016/j.bir.2017.02.002

Bauwens, L., Laurent, S., and Rombouts, J. V. K. (2006). Multivariate GARCH models: A survey. Journal of Applied Econometrics, 21, 79-109.

Belke, A., Dubova, I. and Volz, U. (2017. Long-Term Interest Rate Spillovers from Major Developed Economies to Emerging Asia. ADBI Working Paper 705. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/long-term-interest-rate-spillovers-emerging-asia

Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31, 307-327.

Bollerslev, T., Engle, R. F., and Wooldridge, J. M. (1988). A capital asset pricing model with time-varying covariance. Journal of Political Economy, 96, 116-131.

Burger, J. D., Warnock, F. E. & Warnock, V. C. (2017). The Effects of U.S. Monetary Policy on Emerging Market Economies' Sovereign and Corporate Bond Markets. NBER Working Paper No. 23628 July 2017 JEL No. F21,F3,G15

Chevallier, J. (2012) Time-varying correlations in oil, gas and CO2 prices: an application using BEKK, CCC and DCC-MGARCH models. Applied Economics, 44:32, 4257-4274. https://doi.org/10.1080/00036846.2011.589809

Emenike, O. K. (2021). How does sovereign bond volatility interact between African countries? Journal of Derivatives and Quantitative Studies: Vol. 30 No. 4, 2022 pp. 246-259. https://doi.org/10.1108/JDQS-06-2021-0015

Fama, E. F. (1965). The behavior of stock-market prices. Journal of Business, 38, 34-105.

Giovannetti, G. and Velucchi, M. (2013). A spillover analysis of shocks from US, UK and China on African financial markets. Review of Development Finance 3 (2013) 169–179. http://dx.doi.org/10.1016/j.rdf.2013.10.002

Habibi, H. and Mohammadi, H. (2022). Return and volatility spillovers across the Western and MENA Countries. North American Journal of Economics and Finance 60 (2022) 101642. http://doi.org/10.1016/j.najef.2022.101642

Jebran, K. (2014). Dynamic linkages between Asian countries stock markets: evidence from Karachi Stock Exchange. Res J Mang Sci 3(5):6–13

Kang, S. H. and Yoon, S. M. (2020). Dynamic correlation and volatility spillovers across Chinese stock and commodity futures markets. International Journal of Finance and Economics 2020; 25:261–273. https://doi.org/10.1002/ijfe.1750

Karolyi, G. A. (1995). A multivariate GARCH model of international transmissions of stock returns and volatility: The case of the United States and Canada. Journal of Business and Economic Statistics, 13, 11-25.

Li, H. (2007). International linkages of the Chinese stock exchanges: A multivariate GARCH analysis. Applied Financial Economics, 17, 285-297.

Li, Y. and Giles, D. E. (2015). Modelling Volatility Spillover Effects between Developed Stock Markets and Asian Emerging Stock Markets. International Journal of Finance & Economics. Int. J. Fin. Econ. 20: 155–177 (2015). https://doi.org/10.1002/ijfe.1506.

Lyocsa, S., Baumohl, E., Vyrost, T., & Molnar, P. (2020). Fear of the coronavirus and the stock markets. Finance Research Letters, 36, 101735

Mandelbrot, B. (1963). The variation of certain speculative prices. Journal of Business, 36, 394-419.

Mishkin, F. S. (2005). Is Financial Globalization Beneficial? Working Paper 11891, viewed Apr 23, 2011, http://www.nber.org/papers/w11891

Morema, K. & Bonga-Bonga, L. (2020). The impact of oil and gold price fluctuations on the South African equity market: Volatility spillovers and financial policy implications. Resources Policy 68 (2020) 101740. http://doi.org/10.1016/j.resourpol.2020.101740

Natarajana, V. K., Singhb, A. R. R. & Priya, N. C. (2014). Examining mean-volatility spillovers across national stock markets. Journal of Economics, Finance and Administrative Science 19 (2014) 55–62.

Ncube, M., Ndou, E. & Gumata, N. (2012). How are the US financial shocks transmitted into South Africa? Structural VAR evidence. Working Paper Series N° 157 African Development Bank, Tunis, Tunisia.

Tse, Y. K. and Tsui, A. K. C. (2002). A multivariate generalized autoregressive conditional heteroskedasticity model with time-varying correlations. Journal of Business & Economic Statistics 20: 351-362.

Worthington, A., and Higgs, H. (2004). Transmission of equity returns and volatility in Asian developed and emerging markets: A multivariate GARCH analysis. International Journal of Finance & Economics, 9, 71-80.

Yiu, M. S., Tsang, A. & Nguyen, H. T. (2020). Spillover across Sovereign Bond Markets between the US and ASEAN-4 Economies. Working Paper (WP/20-04), ASEAN+3 Macroeconomic Research Office (AMRO).