Bond yield modelling and its application in the European Union

Zhang, Dalu (2013) Bond yield modelling and its application in the European Union. Doctoral thesis, University of East Anglia.

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Abstract

Forecasting crises has always been an interesting and important topic for econometricians
or statisticians. Literature suggests that government bond yields can be a valid
leading indicator for this purpose. This thesis uses government bond yields and applies
various models to forecast the crisis which happened recently.
Chapter 2 investigates a model utilising the term structure of interest rates to predict
output growth and recession in the UK. In contrast to previous literature, information
retrieved from the whole yield curve is used rather than just the yield spread. Using
di�erent methods, our models are found to outperform the yield spread models both in
in-sample and out-of-sample forecasting. Notably, the B-spline fitting model is able to
forecast the 2009-2010 recession. Moreover, the model with lag of growth shows great
forecasting ability in out-of-sample output growth forecasting. In most cases, models
based on B-spline perform better than the ones based on the Diebold-Li framework.
Chapter 3 examines the existence of time series non-linearities in the real output
growth / recession-term spread relationship. Vector Autoregression (VAR), Threshold
VAR (TVAR), Structural break VAR (SBVAR), Structural break threshold VAR (SBTVAR)
are applied in the analysis. The in-sample results indicate there are non-linear
components in this relationship. And this non-linearity tends to be caused by structural
breaks. The best in-sample model also shows its robustness on arrival of new information
in the out-of-sample tests. Evidence shows the model with only structural break
non-linearity outperforms linear models in 1-quarter, 3-quarter and 4-quarter ahead forecasting.
The European sovereign debt crisis has become a very popular topic since late 2009.
In Chapter 4, the sovereign debt crisis is investigated by calculating the probabilities
of the potential future crisis of 11 countries in the European Union. We use sovereign
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spreads of the European countries against Germany as targets and apply the GARCH
based vine copula simulation technique. The methodology solves the di�culties of calculating
the probabilities of rarely happening events and takes sovereign debt movement
dependence, especially tail dependence, into consideration. Results indicate that Italy
and Spain are the most likely next victims of the sovereign debt crisis, followed by Ireland,
France and Belgium. The UK, Sweden and Denmark, which are outside EMU, are
the most financially stable countries in the sample.

Item Type: Thesis (Doctoral)
Faculty \ School: Faculty of Social Sciences > School of Economics
Depositing User: Mia Reeves
Date Deposited: 11 Jun 2014 11:17
Last Modified: 11 Jun 2014 11:17
URI: https://ueaeprints.uea.ac.uk/id/eprint/48688
DOI:

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