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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce


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Volume 24 (2020)

The term structure of Eurozone peripheral bond yields: an asymmetric regime-switching equilibrium correction approach

Christos Avdoulas
  • Department of Accounting and Finance, Athens University of Economics and Business, 76 Patission Str, GR10434 Athens, Greece
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/ Stelios Bekiros
  • Corresponding author
  • Department of Economics, European University Institute (EUT), Via delle Fontanelle, 18, I-50014, Florence, Italy, Phone: +39 055 4685 916, Fax: +39 055 4685 902
  • Department of Accounting and Finance, Athens University of Economics and Business, 76 Patission Str, GR10434 Athens, Greece, Phone: +302108203300, Fax: +302108228816
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/ Brian Lucey
Published Online: 2019-12-16 | DOI: https://doi.org/10.1515/snde-2018-0105

Abstract

Several studies have established the predictive power of the yield curve i.e. the difference between long and short-term bond rates and the role of asymmetries in the term structure of bond yields with respect to real economic activity. Using an extensive dataset, comprising 3-month, 1-year, 5-year and 10-year constant maturity Treasury bonds for the Eurozone southern periphery countries – the so-called “PIIGS” – from January 1999 to April 2019, we investigate the links between bond yields of different maturities for the Eurozone southern peripheral countries and we find they co-evolve in line with the predictions of the Expectations Hypothesis theory. We demonstrate the presence of nonlinearities in the term structure, and utilize a multivariate asymmetric two-regime Markov-switching VAR methodology to model them properly. Moreover, we address the economic reasoning behind the introduction of an equilibrium-correction regime-switching approach, hence providing potentially important insights on the behaviour of the entire yield curve. We reveal that the regime shifts are related to the state of the business cycle, particularly in economies in which monetary policy decisions are implemented via changes in short-term rates as a response to deviations of output from equilibrium levels. Our results may have important statistical and economic implications on the behaviour of the term structure of bond yields.

Keywords: bond yields; Markov-switching; nonlinear models; term structure

JEL Classification: C32; C58; G10; G17

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Published Online: 2019-12-16


Citation Information: Studies in Nonlinear Dynamics & Econometrics, 20180105, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2018-0105.

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