The Effects of Political Stability in Local Currency Bond Markets

Abstract

This study analyzes the effects of political stability, institutional quality, and event shocks on 1-year, 10- year, and 30-year local currency bond yields. The data were collected from Bloomberg, IMF, World Bank, and OECD and cover 15 emerging market countries on a monthly frequency from January 2007 to February 2017. This study found that higher degrees of political stability and quality lead lower yields and lower default risk. Political event shocks such as party-changing elections lead to increased yields and default risk, while politically-motivated acts of violence affected the slope of yield curve.