Acta academica karviniensia 2020, 20(2):33-47 | DOI: 10.25142/aak.2020.008

DRIVERS OF THE BOND MARKET PREMIUM IN OPEN AND SMALL ECONOMIES AROUND THE EUROZONE

Mercédesz Mészáros, Gábor Dávid Kiss

University of Szeged, Faculty of Economics and Business Administration, 6722 Szeged, Kálvária sgt. 1., Hungary

Nowadays, the examination of bond markets is becoming more prominent as there have been significant changes in the financial market and economic policy processes due to the diverse economic shocks. The room for manoeuvre available for monetary policy is no longer a function of base rates, but rather of the growth of central bank balance sheets – which can also have side-effects on bond yield progresses. Also, QE is only the privilege of large central banks, if smaller central banks use these programs the yield premium will be elevated. Six European small open economies (Czechia, Denmark, Hungary, Poland, Switzerland, Sweden) outside the Eurozone were investigated on quarterly basis between 2007 and 2020 with Autoregressive Distributed Lag (ARDL) cointegration technique.  The aim of our research was to identify the effects of the recent economic shocks - the economic crisis of 2008, the subsequent European sovereign debt crisis and the current corona virus epidemic - on the evolution of international bond yield premia time series in the light of monetary policy, macro variables and financial markets. The results were typically in line with expectations, except that no significant bond market impact of portfolio capital flow could be measured on the sample. The main outcome proved that the unconventional monetary policy increased yield premiums in these analysed countries, meaning that QE is not for small and open economies.

Keywords: ARDL, bond markets, QE, subprime crisis, unconventional monetary policy.

JEL classification: C33, E43, E44, E58, G15

Received: October 1, 2020; Revised: December 14, 2020; Accepted: January 27, 2021; Published: January 28, 2021  Show citation