Three Essays on International Sovereign Bonds




Li, Yulin

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This dissertation consists of three essays that study international sovereign bond prices. The first essay investigates whether the coskewness between developed market sovereign bonds and global equity markets, which can be interpreted as capturing flight-to-quality, can help explain bond returns. This study is motivated by significant pricing effects of higher moments on equity assets. A global coskewness factor, defined as the return difference between the most negative coskewness bond portfolio and the most positive coskewness bond portfolio, is associated with an average of 43.8 basis points per month. Additionally, this paper explores the implications of coskewness for sovereign debt yields and monetary policies. Decreases in coskewness are significantly associated with declines in bond yields, and countries with a monetary policy which explicitly targets monetary aggregates have lower coskewness. Moreover, the results suggest that countries which adopt monetary policies explicitly targeting monetary aggregates reduce their borrowing costs due to more negative coskewness. The second essay explores the impact of investor sentiment on sovereign bond returns in emerging markets. Using local sovereign debt and external (USD) sovereign debt, this study finds that sentiment is negatively related to future bond returns on average across emerging market (EM) countries. This negative sentiment effect suggests that investors treat emerging market sovereign bonds as risky assets rather than as safe assets. I further find that this sentiment effect is relatively stronger when liquidity frictions are higher, which is consistent with illiquid bonds being generally harder to arbitrage. The third essay documents that the third moment (skewness) of unemployment growth helps to predict international sovereign bond returns, a finding that is robust to controlling for a set of well-established factors. Skewness effects of unemployment change on subsequent sovereign bond returns are positive and significant. While investors require risk premia for exposure to macroeconomic shocks (Campbell, 1996), this study finds that the skewness changes in unemployment contains information that is priced beyond the shocks to the unemployment rate. The relation between sovereign bond markets and the skewness of unemployment growth is greater in economic expansions than contractions.


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International Finance, Sovereign Bond Returns, Sovereign Interest Rates