The global and regional factors in the volatility of emerging sovereign bond markets

Abstract

This paper examines how much the volatility of sovereign bond markets in emerging Latin American countries is influenced by the volatility shocks to global and regional markets. After estimating the Generalised AutoRegressive Conditional Heteroscedasticity (GARCH)-based conditional volatility for sample markets, we measure the parts of sovereign bond market volatility that are attributable to the global and regional factors within the dynamic framework of a Structural Vector Autoregressive (SVAR) model. We find significant and persistent volatility spillovers from the global and regional factors to sovereign bond markets, with a dominant effect issued by the global sovereign bond market. We also find evidence that the global and regional markets are, on average, responsible for more than 45% of the variance of volatility changes in three of the five selected emerging countries over a 12-week forecast horizon.