Macroeconomic Determinants of Lithuanian Government Security Prices

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.

Pengaruh Faktor Makro Ekonomi, Faktor Likuiditas Dan Faktor Eksternal Terhadap Yield Obligasi Pemerintah Indonesia

“…Beberapa penelitian terakhir telah menautkan variabel-variabel fundamental makro ekonomi, faktor eksternal mau pun kondisi likuiditas dengan pasar obligasi. Kondisi makro ekonomi pada negara berkembang harus diperhatikan karena dapat juga menciptakan krisis ekonomi seperti yang terjadi di Asia tahun 1997, Rusia tahun 1998 dan Argentina tahun 2000 (Jurksas dan Kropiene, 2014). Suku bunga internasional dapat juga memengaruhi aliran modal ke dalam negara berkembang (Min, 1998).…”

“…Beberapa penelitian telah menautkan variabel-variabel fundamental makro ekonomi dengan pasar obligasi. Negara-negara berkembang harus memperhitungkan risiko makro karena hal tersebut dapat menciptakan krisis ekonomi seperti yang terjadi di Asia tahun 1997, Rusia tahun 1998 dan Argentina tahun 2000 (Jurksas dan Kropiene, 2014).…”

Macro economics: Liquidity, Solvency, and External Factor as Determinant of Government Bond Index Yield (INDOBEXGB) with The Vector Error Correction Model (VECM)

“…It means that when there is an increase in the money supply in the market by one percent in the previous two years, it will increase the yield of the INDOBexGB state bond index by 4.67 percent in the current year and will increase in the long term by 1.39 percent. Simply put, an increase in the money supply can lead to a rise in interest rates and expected returns, which in turn will cause an increase in bond yields (Jurkšas & Kropienė, 2014). The foreign exchange reserve variable for the second lag is not a significant positive effect in the short term and shows a significant negative.…”

“…Money supply in the broadest sense is M1 plus quasi money (sometimes also called Near money), namely (short) time deposits, overnight loans between banks, savings, and domestic private currency accounts (Putong, 2015). All of the macroeconomic variables studied (Jurkšas & Kropienė, 2014, the money supply has the most significant influence on government bonds' price. An increase in the money supply can pose risks to bonds, especially the risk of rising interest rates, which will increase the expected return and yield of state bonds.…”

“…Some other price indexes can also measure inflation, such as the wholesale Price Index and the GNP deflator. In research (Jurkšas & Kropienė, 2014) found that inflation can be a picture of the quality of how a country regulates its economy. The CPI reflects consumption expenditure, an increase in the CPI will reduce consumption expenditure due to falling real consumption values, and slow the economy.…”