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Sovereign yield curves and the COVID-19 in emerging markets

Author

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  • Candelon, Bertrand

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Moura, Rubens
Abstract
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.

Suggested Citation

  • Candelon, Bertrand & Moura, Rubens, 2023. "Sovereign yield curves and the COVID-19 in emerging markets," LIDAM Reprints LFIN 2023010, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2023010
    DOI: https://doi.org/10.1016/j.econmod.2023.106453
    Note: In: Economic Modelling, 2023, vol. 127, 106453
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    1. Hong, Zhiwu & Wang, Zhenhan & Li, Xinda, 2024. "Foreign trade and China’s yield curve during the COVID-19 pandemic: An analysis based on an extended arbitrage-free Nelson–Siegel model," Research in International Business and Finance, Elsevier, vol. 70(PB).
    2. Gomez-Gonzalez, Jose E. & Uribe, Jorge M. & Valencia, Oscar, 2024. "Sovereign Risk and Economic Complexity," IDB Publications (Working Papers) 13393, Inter-American Development Bank.
    3. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2023. "Sovereign Risk and Economic Complexity: Machine Learning Insights on Causality and Prediction," IREA Working Papers 202315, University of Barcelona, Research Institute of Applied Economics, revised Nov 2023.
    4. Gomez-Gonzalez, Jose E. & Uribe, Jorge M. & Valencia, Oscar, 2024. "Asymmetric Sovereign Risk: Implications for Climate Change Preparation," IDB Publications (Working Papers) 13447, Inter-American Development Bank.

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    More about this item

    Keywords

    Term structure of interest rates ; COVID-19 pandemic ; Global financial market ; Economic connectedness;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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