پویایی های بازار اوراق قرضه و عوامل اقتصاد کلان: شواهدی از بازارهای نوظهور و مرزی

This paper examines the co-movement dynamics of ten emerging and four frontier government bond markets with the US market and the impact of macroeconomic factors and global bond market uncertainty on the time-varying co-movement. We find that macroeconomic factors play important role in explaining time variations in the bond return co-movement. Specifically, domestic macroeconomic factors have higher relative importance than global factors, with domestic monetary policy and domestic inflationary environment identified as the most influential factors. The global bond market uncertainty, based on an implied volatility measure, has explanatory power in driving co-movement dynamics in emerging and frontier bond markets.

This paper focuses on the co-movement dynamics of emerging and frontier government bond markets with the US market and driving forces behind the time-varying co-movement. The issue of co-movement dynamics among international bond markets is of great importance in asset allocation management and investors' diversification strategies. Most of the literature on the international co-movement across government bond markets has concentrated on the developed bond markets (e.g. Barr and Priestley, 2004, Kumar and Okimoto, 2011 and Yang, 2005), while the studies on emerging bond markets are relatively thin (Bunda et al., 2009 and Vo, 2009).1 The examination of emerging bond markets warrants attention given the increasing demand for emerging market assets by international investors searching alternative asset classes able to provide diversification benefits and high returns.2 Emerging markets' bonds have become a viable investment vehicle in the recent years, considering the following facts: (i) emerging markets have a tendency to grow rapidly; (ii) emerging markets' bonds have been the second largest source of financing to emerging markets since the beginning of the 1990s; and (iii) market liquidity and transparency in emerging bond markets have been enhanced in recent decade (see, e.g. Bunda et al., 2009, McGuire and Schrijvers, 2003 and McGuire and Schrijvers, 2006). The purpose of this study is two-fold. First, we investigate the dynamics of the government bond return co-movement of ten emerging and four frontier markets with the US market over the period 2000–2011 by applying the Dynamic Condition Correlation (DCC) GARCH framework.3 The bivariate (individual emerging and frontier bond market versus the US bond market) DCC–GARCH modeling enables assessment of time-varying co-movement among investigated markets. Second, acknowledging the importance of understanding the driving forces behind the time-varying co-movement between international bond markets, we investigate whether global and domestic macroeconomic factors and global bond market uncertainty play important roles in explaining these time variations. The macro factors in our empirical framework include the business cycle fluctuations, the inflation environment, and monetary policy stance; which is in line with previous studies on the relationship between asset returns and macroeconomic fundamentals (Ilmanen, 2003, Li, 2004 and Yang et al., 2009). In addition to macroeconomic fundamentals, the literature also provides evidence that perceived market risk or uncertainty has an important impact on the co-movement dynamics of asset returns. For instance, in the literature on the co-movement between stocks and bonds, implied volatility from stock index options is used as a measure of stock market uncertainty (Andersson et al., 2008, Connolly et al., 2005, Connolly et al., 2007 and Kim et al., 2006b). The aforementioned studies provide evidence that stock market uncertainty, as measured by implied volatility, affects time variations in the co-movement of stock and government bond returns. Our study builds upon the proposed use of implied volatility measures as proxies for market uncertainty. Extending the work of Connolly et al. (2005), we apply a bond market uncertainty measure to examine the impact of global bond market uncertainty on time variations in international bond market co-movement. Specifically, we use the Merrill Lynch Option Volatility Estimate MOVE Index (a widely-followed measure of government bond volatility derived from option prices on US Treasury bonds) as a proxy for global bond market uncertainty. Our study contributes to the literature in three ways. First, while most of the previous studies on international bond market co-movement have focused on the correlation dynamics between international markets, we examine the driving forces behind the time-variation of the bond return correlations. In particular, we investigate the role of both global and domestic macroeconomic fundamentals in explaining variations in bond return co-movement. Our research is closely related to Hunter and Simon (2005), who find that the co-movement between the US and other major bond markets (the UK, Germany, and Japan) returns is driven by changing macroeconomic conditions. Specifically, they identify monetary policy and the business cycle conditions as important factors in explaining time-varying correlations. Our study differs from Hunter and Simon (2005) by focusing on different roles of global and domestic macroeconomic factors, especially in the context of emerging bond markets. Second, a novel feature of our study is provided by examining the influence of global bond market uncertainty on time variations in bond market co-movement. Hence, our paper extends the literature on market uncertainty (Andersson et al., 2008, Connolly et al., 2005, Connolly et al., 2007 and Kim et al., 2006b) by developing connections between bond market uncertainty (based on an implied volatility measure) and co-movement dynamics. Third, our study investigates a comprehensive set of emerging and frontier bond markets, contributing a new dimension to the literature on international bond market co-movement that has traditionally focused on developed markets.4 There is very little research on emerging market bonds relative to emerging market equities, and there is much left to learn about emerging market bonds as pointed out by Erb et al. (1999). Emerging market bonds have attracted considerable attention among international investors for their very high average rates of return during the 1990s, and a number of authors have emphasized their benefits (Dahiya, 1997 and Froland, 1998). The benefits of diversification across major developed government bond markets were alive and well in the period 1992–2002 (Hunter and Simon, 2005). However, as a consequence of the global financial turmoil of 2008–2009 and the recent sovereign bond crisis in Europe, there is a renewed interest in reassessing co-movement dynamics of international bond markets. Hence, our study provides new insights into the field of international bond markets' co-movement from the emerging market perspective. The major findings of this study are: (i) there is considerable variation across emerging and frontier markets in the patterns of dynamic correlation with the US bond market; (ii) macroeconomic factors play an important role in explaining time variations in the bond return co-movement of emerging and frontier markets with the US government bond market; (iii) domestic macroeconomic factors are of higher relative importance compared to global factors, with domestic monetary policy and domestic inflationary environment identified as the most influential factors; and (iv) global bond market uncertainty, as measured by implied volatility, might have explanatory power in driving co-movement dynamics in emerging and frontier bond markets. The remainder of this paper is organized as follows. Section 2 provides a brief review of the related literature. Section 3 presents data and the descriptive statistics. In Section 4, we set out a brief description of the econometric approach. The empirical results are presented in Section 5, while Section 6 provides conclusions.

This paper investigates the dynamics of emerging and frontier government bond markets' co-movement with the US market and the driving forces behind the time-varying co-movement. In particular, we examine whether domestic and global macroeconomic factors and global bond market uncertainty play an important role in explaining the dynamics of bond return co-movement in emerging and frontier markets. The empirical results of this study are threefold. First, we find considerable variation in the patterns of the correlation dynamic paths across the countries. Brazil, Russia, Turkey, and Ecuador sustained longer time intervals of negative correlation with the US market, while on the other hand China, Mexico, Poland, and South Africa had predominantly positive correlations with very short episodes of negative correlation. We also document very sudden and sharp changes in the dynamic correlation patterns, suggesting that such changes are a feature of emerging and frontier bond markets that international diversification strategies should take into account. Second, the results of our analysis indicate that domestic and global macroeconomic factors can explain time variations in the bond return co-movement of emerging and frontier markets with the US government bond market. In particular, domestic macroeconomic factors are found to be of higher relative importance compared to global factors. Specifically, of the complete set domestic and global factors investigated, domestic monetary policy and domestic inflationary environment are identified as the most prominent variables affecting bond return co-movement, while the global business cycle fluctuation factor is the most influential among just the global factors. Our finding on the importance of monetary policy is consistent with Hunter and Simon (2005), but our study also provides new findings to the literature in light of different roles of global and domestic macroeconomic factors and importance of domestic inflationary environment in the context of emerging bond markets co-movement. Finally, our empirical findings demonstrate that global bond market uncertainty, based on an implied volatility measure, significantly affects the bond return co-movement dynamics of emerging and frontier markets with the US market. Hence, our results indicate that uncertainty around the future movements on the US bond market might have explanatory power in driving co-movement dynamics in emerging and frontier bond markets. While our finding is in line with Connolly et al. (2005), who documented an important role of stock market uncertainty in driving stock-bond co-movement dynamics, to our knowledge, empirical evidence on the impact of global bond market uncertainty on the bond market co-movement dynamics is not yet reported in the literature. This study has both important academic and practical implications. We provide new insights into the field of international bond market co-movement from the emerging and frontier markets' perspective. In addition, we contribute a new dimension to the literature by providing the analysis of driving forces behind time-varying bond return co-movement, with special emphasis on macroeconomic factors and bond market uncertainty. Our co-movement analysis also has practical implications for investors in terms of international diversification strategies. For instance, the low level of dynamic interaction of certain emerging and frontier markets with the US bond market, identified in our study, might help international investors select target countries with the greatest diversification potential. Our findings might be also useful in macroeconomic policy formulation, since understanding the dynamics of the international bond market co-movement is important for modeling and forecasting long-term interest rates. There are several potential extensions for further research. For instance, the co-movement analysis of frontier and emerging government bond markets with developed markets could be extended with respect to the largest European developed markets (Germany and the UK). Alternatively, a regional perspective could be taken in investigating the co-movement dynamics only among the frontier and emerging bond markets' group. Other possible direction for further research would be examining how time-varying stock-bond correlations in frontier and emerging markets may be driven by domestic and global macroeconomic conditions.