Bond Markets Co-Movement Dynamics and Macroeconomic Factors: Evidence from Emerging and Frontier Markets
32 Pages Posted: 18 Aug 2012 Last revised: 22 Feb 2013
Date Written: December 21, 2012
This paper examines the co-movement dynamics of ten emerging and four frontier government bond markets with the US market and driving forces behind the time-varying co-movement. Using the Dynamic Conditional Correlation (DCC) bivariate GARCH framework, we first analyze dynamic correlation patterns and then investigate whether domestic and global macroeconomic factors and global bond market uncertainty can explain time variations in the correlation patterns. The results indicate considerable variation in the correlation dynamic paths across the countries, implying that emerging/frontier bond markets, taken as a single group, constitute a good alternative source of diversification benefits for the US investors. In particular, frontier markets appear to have higher diversification potential than emerging markets. We also find that macroeconomic factors and global bond market uncertainty play important roles in explaining time variations in the bond return co-movement. Specifically, domestic macroeconomic factors are of higher relative importance than global factors, with domestic monetary policy and domestic inflationary environment identified as the most influential factors.
Keywords: emerging market bonds, macroeconomic factors, co-movement of bond returns
JEL Classification: F30, G15
Suggested Citation: Suggested Citation