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Forecasting Local Currency Bond Risk Premia of Emerging Markets: The Role of Cross-Country Macro-Financial Linkages

Author

Listed:
  • Oguzhan Cepni

    (Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050 Ulus, Altndag, Ankara, Turkey)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • I. Ethem Guney

    (Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050 Ulus, Altndag, Ankara, Turkey)

  • M. Hasan Yilmaz

    (Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050 Ulus, Altndag, Ankara, Turkey)

Abstract
In this paper, we forecast local currency debt of five major emerging market countries (Brazil, Indonesia, Mexico, South Africa, and Turkey) over the period of January 2010 to January 2019 (with an in-sample: March 2005 to December 2018). We exploit information from a large set of economic and financial time series to assess the importance of not only “own-country” factors (derived from principal component and partial least squares approach), but also create “global” predictors by combining the country-specific variables across the five emerging economies. We find that while information on own-country factors can outperform the historical average model, global factors tend to produce not only greater statistical and economic gains, but also enhances market timing ability of investors, especially when we use the target-variable (bond premium) approach under the partial least squares method to extract our factors. Our results have important implications for not only fund managers, but also policymakers.

Suggested Citation

  • Oguzhan Cepni & Rangan Gupta & I. Ethem Guney & M. Hasan Yilmaz, 2019. "Forecasting Local Currency Bond Risk Premia of Emerging Markets: The Role of Cross-Country Macro-Financial Linkages," Working Papers 201957, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201957
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    2. Ge, Futing & Zhang, Weiguo, 2022. "The determinants of cross-border bond risk premia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Bond risk premia; Emerging markets; Factor extraction methods; Out-of-sample forecasting;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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