Author: Mr. Itai Agur, Melissa Chan, Mr. Mangal Goswami, and Mr. Sunil Sharma
The paper investigates the international integration of EM sovereign dollar-denominated
and local-currency bond markets. Factor analysis is used to examine movements in
sovereign bond yields and common sources of yield variation. The results suggest that EM
dollar-denominated sovereign debt markets are highly integrated; a single common factor
that is highly correlated with US and EU interest rates explains, on average, about 80
percent of the total variability in yields. EM sovereign local currency bond markets are not
as internationally integrated, and three common factors explain about 74 percent of the
total variability. But a factor highly correlated with US and EU interest rates still explains
63 percent of the yield variation accounted for by common factors. That said, there is
some diversity among EM countries in the importance of common factors in affecting
sovereign debt yields.
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