Abstract
This paper deals with the impact of macroeconomic fundamentals on Lithuanian government securities’ prices using quarterly data for the period 2000–2013, applying five major macroeconomic variables: gross domestic product, consumer prices, interest rates, money supply, and foreign direct investment. The two main goals of the paper are: 1) to identify macroeconomic variables which are the main driving forces behind debt security prices and 2) due to the lack of sufficient data on the Lithuanian government security index, to create and calculate a similar index from the primary and secondary market sovereign security prices. The research has been conducted using the methods of descriptive statistics, the vector autoregression model, the impulse response function, and the forecast error variance decomposition. The paper finds that, when consumer prices or interest rate rise up, sovereign security prices decline significantly and, on the other hand, money supply is the only factor that significantly and directly influences the government security prices. However, the effects of the gross domestic product and foreign direct investment were found to be statistically insignificant. Finally, the government security index is inert and rarely changes its long-term trend. These conclusions provide related persons with rich information in establishing the investment strategy or fiscal / monetary policy.
Highlights
What are the main driving forces behind debt security prices? Is it liquidity or credit risk? Or are debt securities more affected by changing the term structure of yields, downgrade / upgrade of credit rating, or even speculation? Until recently, most of the researchers have come to the above-mentioned conclusions
The results of the PP test showed that the null hypothesis of a unit root was rejected for the first difference specification in all cases, but the augmented Dickey–Fuller (ADF) test revealed that HICP and M2 should be differentiated twice
Since differentiating more than once has not much economic sense, the vector autoregression (VAR) model, impulse response functions and forecast error variance decomposition (FEVD) will be employed with variables of one difference – in this case indicators will be marked with Δ before the ticker, for example, ∆GS
Summary
What are the main driving forces behind debt security prices? Is it liquidity or credit risk? Or are debt securities more affected by changing the term structure of yields, downgrade / upgrade of credit rating, or even speculation? Until recently, most of the researchers have come to the above-mentioned conclusions. What are the main driving forces behind debt security prices? Since the start of the last financial crisis, empirical studies about the transmission of macroeconomic forces to debt security prices gained momentum. The interest to reassessing the relationship between macroeconomic forces and government security prices is renewed. The demand for government securities from emerging markets is rapidly increasing due to international investors who search for higher returns and / or diversification benefits. Emerging markets experience unique, country-specific macro risks that sometimes lead to internal economic crises, e.g., the Asian crisis of 1997, the Russian crisis of 1998 or the Argentinian crisis of 2000. One can expect that the relationship between country-specific factors and government securities in emerging markets is much tighter than in developed countries, and the examination of these ties is extremely important for both investors and for policy-makers
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