TY - JOUR
T1 - Sovereign yield curves and the COVID-19 in emerging markets
AU - Candelon, Bertrand
AU - Moura, Rubens
N1 - Funding Information:
? The authors thank the editor Sushanta Mallick and two anonymous referees for helpful comments. We are also grateful for feedback from Vincent Bodart, Marcelo Fernandes, Oscar Meneses, Yang Mestre-Zhou (discussant), Alessandro Scopelliti, the participants at the 3rd Financial Economics Meeting from the Mediterranean Association of Economics and Finance, at the 7th International Workshop on Financial Markets and Nonlinear Dynamics, at the 2nd Michel Terraza Econometrics Workshop at Montpellier University. This research was conducted as part of the research program entitled “Financial and Extra-financial Risks Modeling” under the aegis of the Europlace Institute of Finance, a joint initiative with Insti7. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Banco de Mexico.
data source:
PY - 2023/10/1
Y1 - 2023/10/1
N2 - This study examines the determinants of sovereign yield curves in four major emerging economies (Brazil, India, Mexico, and Russia) during the COVID-19 crisis. In light of increasing worldwide financial, macroeconomic, and sanitary interdependence, we construct an arbitrage-free affine term structure model that incorporates a global vector autoregressive process to capture the joint dynamics of risk factors. Our findings reveal three key insights. Firstly, a surge in the global transmission rate of the coronavirus leads to an escalation in sovereign borrowing costs, potentially indicating an amplified sovereign default risk. Secondly, foreign macrofinancial factors emerge as prominent drivers of yield curve movements, underscoring the importance of cross-border spillover effects in the contemporary financially interconnected global economy. Lastly, bond risk premia peak during the pandemic outbreak but subsequently stabilize, indicating effective policy interventions to restore calm in bond markets. Additionally, we outline policy implications derived from our findings.
AB - This study examines the determinants of sovereign yield curves in four major emerging economies (Brazil, India, Mexico, and Russia) during the COVID-19 crisis. In light of increasing worldwide financial, macroeconomic, and sanitary interdependence, we construct an arbitrage-free affine term structure model that incorporates a global vector autoregressive process to capture the joint dynamics of risk factors. Our findings reveal three key insights. Firstly, a surge in the global transmission rate of the coronavirus leads to an escalation in sovereign borrowing costs, potentially indicating an amplified sovereign default risk. Secondly, foreign macrofinancial factors emerge as prominent drivers of yield curve movements, underscoring the importance of cross-border spillover effects in the contemporary financially interconnected global economy. Lastly, bond risk premia peak during the pandemic outbreak but subsequently stabilize, indicating effective policy interventions to restore calm in bond markets. Additionally, we outline policy implications derived from our findings.
KW - COVID-19 pandemic
KW - Economic connectedness
KW - Global financial market
KW - Term structure of interest rates
U2 - 10.1016/j.econmod.2023.106453
DO - 10.1016/j.econmod.2023.106453
M3 - Article
SN - 0264-9993
VL - 127
JO - Economic Modelling
JF - Economic Modelling
M1 - 106453
ER -