Applying multivariate-fractionally integrated volatility analysis on emerging market bond portfolios

Abstract

This study examines emerging market (EM) local bonds from a portfolio risk perspective and suggests methodologies for risk evaluation, on which the literature is limited. Despite the growth of EM bond funds in recent years, comprehensive studies regarding this industry have been scarce. In light of this, 203 different local bonds of EM countries—Indonesia, Brazil, India, South Africa, Mexico, and Turkey—are elaborated in terms of return, volatility, and cross-correlation features. This study focuses on an untouched field—long memory properties—and the application of fractional models to EM bond portfolios. Based on the outcomes of a dynamic conditional correlation and fractionally integrated generalized autoregressive conditional heteroscedasticity approach and related value at risk analysis, the study finds that fractional models are useful tools for risk management, as they deliver satisfactory empirical results for several static and dynamic versions of EM bond portfolios.

The COVID-19 pandemic and the degree of persistence of US stock prices and bond yields

“…They found that the degree of integration of the series (their persistence) is inversely related to the maturity of the bonds. Finally, Demirel and Unal (2020) analysed 203 local bonds in the emerging markets of Indonesia, Brazil, India, South Africa, Mexico, and Turkey from a portfolio risk perspective; specifically, they estimated fractional models for risk evaluation.…”

Regime Detection in Sub-Saharan Africa Equity Markets A Hidden Markov Model Approach

“…Changes in market regimes have been identified extensively in the emerging markets by various authors (Demirel and Unal, 2020). The switches or changes in regimes observed in the markets are a function of a number of factors.…”

The COVID-19 Pandemic and the Degree of Persistence of US Stock Prices and Bond Yields

“…used variants on the Nelson-Siegel exponential components framework to model the yield curve; they showed that the three time-varying parameters may be interpreted as factors corresponding to the level, slope, and curvature respectively, and estimated autoregressive models for the factors to generate short-and long-term forecasts Demirel and Unal (2020). analysed 203 local bonds in the emerging markets of Indonesia, Brazil, India, South Africa, Mexico, and Turkey from a portfolio risk perspective; specifically, they estimated fractional models for risk evaluation.…”