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Correlations across Asia-Pacific bond markets and the impact of capital flow management measures

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  • Chantapacdepong, Pornpinun
  • Shim, Ilhyock

Abstract

Using a novel database on capital flow management measures in Asia over 2004–2013, we investigate the impact of bond inflow management measures on the cross-market correlations of weekly bond fund flows and of daily bond returns in 12 Asia-Pacific economies, after controlling for global, regional and local factors. We find that a bond inflow management measure taken by a country tends to increase the correlation of bond flows into the country with those into other countries in the region. In particular, a country’s policy actions to loosen (ie increase) bond inflows significantly increase bond flow correlations, but policy actions to tighten (ie decrease) bond inflows have no significant impact. We also find that bond inflow management measures increase bond return correlations in the long run. These results can be explained by the signalling hypothesis, under which global investors expect that when a country takes a bond inflow management measure other countries to take similar actions, so that they increase or decrease their investment in the region at the same time.

Suggested Citation

  • Chantapacdepong, Pornpinun & Shim, Ilhyock, 2015. "Correlations across Asia-Pacific bond markets and the impact of capital flow management measures," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 71-101.
    • Handle: RePEc:eee:pacfin:v:34:y:2015:i:c:p:71-101
    DOI: 10.1016/j.pacfin.2015.05.005
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    Cited by:

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    2. Eli M Remolona & Ilhyock Shim, 2015. "The rise of regional banking in Asia and the Pacific," BIS Quarterly Review, Bank for International Settlements, September.
    3. Punzi, Maria Teresa & Chantapacdepong, Pornpinun, 2017. "Spillover Effects of Unconventional Monetary Policy in Asia and the Pacific," ADBI Working Papers 630, Asian Development Bank Institute.
    4. Yang Zhou & Shigeto Kitano, 2022. "Effectiveness of Capital Controls: Gates versus Walls," Discussion Paper Series DP2022-38, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2023.
    5. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2016. "Emerging trends in Asia-Pacific finance research: A review of recent influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 66-76.
    6. David Gabauer & Sowmya Subramaniam & Rangan Gupta, 2022. "On the transmission mechanism of Asia‐Pacific yield curve characteristics," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 473-488, January.

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    More about this item

    Keywords

    Bond flow; Bond return; Cross-market correlation; Capital flow management measure;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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