Volatility co-movements between emerging sovereign bonds: Is there segmentation between geographical areas?

This paper analyses the dynamic interrelationship between spreads on selected sovereign bonds issued by 10 emerging countries. It investigates the nature of the volatility transmission in secondary bond markets through conditional covariance estimates obtained by orthogonal methods. This approach, which combines PCA with GARCH volatility modelling, filters away idiosyncratic news and focuses on spreads dynamics driven by common factors. We find convincing evidence of co-movements between spread changes; more within than across geographical areas. Conditional covariations increase in periods of turbulence and subsequently subside. The time-varying minimum variance artificial portfolios, which are used here for model validation, show that, in spite of systemic risk, international portfolio diversification is still a powerful strategy for risk reduction.