Estimating Hungarian bond yields

Judit Hevér
Junior Macro Analyst

With an error-correction model

In recent years the yields on 5-year Hungarian government bonds have fairly consistently followed the Itraxx Crossover index, which tracks the premiums on high-risk European corporate bonds. Meanwhile, yields on 10-year annual government securities have been conspicuously in step with the implied volatility calculated from options offered on the EUR/HUF exchange rate. The existence of a close relationship between these factors is also suggested by the high – over 0.9 – correlation coefficient. The empirical findings can be supported by economic theory: under the approach taken by conventional capital-market
models, the expected yield is function of the assumed risk. Due to the composition of its basket, the Itraxx Crossover can be regarded as a global barometer of our expectations with regard to the risk premium of instruments with a similar rating to that of Hungarian government securities. The implied volatility, deduced from the EUR/HUF exchange rate, is impacted by both the general perception of risk in the domestic market, and the global appetite for risk.


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