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Long-Run Movement and Predictability of Bond Spread for BRICS and PIIGS: The Role of Economic, Financial and Political Risks

Author

Listed:
  • Sheung-Chi Chow

    (Research Institute of Business, Hang Seng Management College)

  • Rangan Gupta

    (University of Pretoria, Pretoria, South Africa)

  • Tahir Suleman

    (School of Economics and Finance, Victoria University of Wellington and School of Business, Wellington Institute of Technology)

  • Wing-Keung Wong

    (Department of Finance, Asia University and Department of Economics, Lingnan University)

Abstract
This study bridges the gap in the literature to examine co-movement and predictability of Bond Spread of BRICS and PIIGS with respect to political risk (PR), financial risk (FR), and economic risk (ER). Our cointegration results conclude that there is strong long run co-movement between the various risks and bond spread for both BRICS and PIIGS. However, both linear and nonlinear Granger causality tests show that not all risks strongly predict bond spread for both BRICS and PIIGS. Our linear Granger causality findings imply that PR is the most important risk in predicting bond spread, followed by ER in both BRICS and in PIIGS, while FR is only weakly useful in predicting bond spread in BRICS but not in PIIGS. Our nonlinear individual causality results infer that ER is the most important risk in predicting bond spread, followed by FR, and PR. In this paper, we make a conjecture that linear and nonlinear causality are independent and our findings support this, and thus, we recommend academics and practitioners conduct both linear and nonlinear causality analysis in their work. The outcomes of this paper are useful for portfolio managers, investors in fixed income market and government agencies.

Suggested Citation

  • Sheung-Chi Chow & Rangan Gupta & Tahir Suleman & Wing-Keung Wong, 2017. "Long-Run Movement and Predictability of Bond Spread for BRICS and PIIGS: The Role of Economic, Financial and Political Risks," Working Papers 201773, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201773
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    Cited by:

    1. Nguyen Huu Hau & Tran Trung Tinh & Hoa Anh Tuong & Wing-Keung Wong, 2020. "Review of Matrix Theory with Applications in Education and Decision Sciences," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(1), pages 28-69, March.
    2. Adhiraj Sodhi & Cesario Mateus & Irina Mateus & Aleksandar Stojanovic, 2023. "Determinants of Repurchase Size: Evidence from the UK," JRFM, MDPI, vol. 16(9), pages 1-29, September.
    3. Kim-Hung Pho & Tuan-Kiet Tran & Thi Diem-Chinh Ho & Wing-Keung Wong, 2019. "Optimal Solution Techniques in Decision Sciences A Review," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(1), pages 114-161, March.
    4. Andy Wui-Wing Cheng & Nikolai Sheung-Chi Chow & David Kam-Hung Chui & Wing-Keung Wong, 2019. "The Three Musketeers Relationships between Hong Kong, Shanghai and Shenzhen Before and After Shanghai–Hong Kong Stock Connect," Sustainability, MDPI, vol. 11(14), pages 1-20, July.
    5. Wenjing Xie & João Paulo Vieito & Ephraim Clark & Wing-Keung Wong, 2020. "Could Mergers Become More Sustainable? A Study of the Stock Exchange Mergers of NASDAQ and OMX," Sustainability, MDPI, vol. 12(20), pages 1-25, October.
    6. Kim-Hung Pho & Thi Diem-Chinh Ho & Tuan-Kiet Tran & Wing-Keung Wong, 2019. "Moment Generating Function, Expectation And Variance Of Ubiquitous Distributions With Applications In Decision Sciences: A Review," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(2), pages 65-150, June.

    More about this item

    Keywords

    Country Risk; Bond Spread; Linear and Nonlinear Granger Causality;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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