This paper investigates the determinants of sovereign bond yields in the case of ten Economic and Monetary Union (EMU) countries (five core economies and five peripheral countries) for the period of 2001-2015. To this end, we carry out a two-step methodology based on (i) a principal component analysis of the countries’ yields, which is aimed at splitting our sample into sub-periods, and (ii) a random forest model to investigate the determinants of bond yields in any identified sub-period enhanced with a variable selection process with simulated annealing. Our analysis indicates that macroeconomic fundamentals (especially the unemployment rate, the inflation rate and the government debt to the GDP change rate) are the main variables responsible for the sovereign bond yields in all the countries analyzed, both core and peripheral. In contrast, the bond yields do not seem to be intensively influenced by global indicators over the whole sampling period.

The Determinants of Sovereign Bond Yields in the EMU: New Empirical Evidence

Edgardo Sica
2018-01-01

Abstract

This paper investigates the determinants of sovereign bond yields in the case of ten Economic and Monetary Union (EMU) countries (five core economies and five peripheral countries) for the period of 2001-2015. To this end, we carry out a two-step methodology based on (i) a principal component analysis of the countries’ yields, which is aimed at splitting our sample into sub-periods, and (ii) a random forest model to investigate the determinants of bond yields in any identified sub-period enhanced with a variable selection process with simulated annealing. Our analysis indicates that macroeconomic fundamentals (especially the unemployment rate, the inflation rate and the government debt to the GDP change rate) are the main variables responsible for the sovereign bond yields in all the countries analyzed, both core and peripheral. In contrast, the bond yields do not seem to be intensively influenced by global indicators over the whole sampling period.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11369/366593
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