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What Explains the Volatility in Pakistan’s Sovereign Bond Yields?

Author

Listed:
  • Mohsin Waheed

    (State Bank of Pakistan)

  • Zulfiqar Hyder

    (State Bank of Pakistan)

Abstract

In this paper, we determine the significant domestic and external drivers of volatility in Pakistan’s sovereign bond yield-to-maturity (YTM) across different tenors. We use a class of volatility models (GARCH, TGARCH, and EGARCH) on daily data starting from January 2019 to October 2022. We find that, in addition to domestic macroeconomic fundamentals, political factors also contribute substantially to the volatility in bond yields. Additionally, we also argue that foreign investors’ risk perception is susceptible to exchange rate depreciation, import cover, and sovereign ratings. On the external side, we find that the general riskiness perception of emerging market bonds as measured by Emerging Market Bond Index Spreads significantly explains the volatility of Pakistan’s sovereign bonds.

Suggested Citation

  • Mohsin Waheed & Zulfiqar Hyder, 2023. "What Explains the Volatility in Pakistan’s Sovereign Bond Yields?," SBP Working Paper Series 112, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:112
    as

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    File URL: https://www.sbp.org.pk/publications/wpapers/2023/wp112.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Volatility; Sovereign bonds; Yield; Eurobond; Sukuk; Spreads;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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