A0633
Title: A two-factor model of sovereign bond volatilities
Authors: Susana Campos Martins - University of Oxford (United Kingdom) [presenting]
Robert Engle - NYU Stern (United States)
Abstract: The global common volatility (COVOL) model of a recent study is extended for applications where one global factor is not enough to capture worldwide common variation in financial volatilities or the correlation of shocks to those volatilities. The two-factor model is developed to measure the common volatility shocks to sovereign bond indices. Their volatilities are not only driven by a global but also a group-specific, presumably European, volatility factor. Some of the events that would have been identified as global, such as presidential elections, turn out to have a much lower impact globally. Other events have an amplified effect when group-specific common effects are allowed, meaning European countries are much more impacted by these such as the 2016 European Union membership referendum in the United Kingdom.
