IDEAS home Printed from https://ideas.repec.org/a/wly/ijfiec/v27y2022i1p473-488.html
   My bibliography  Save this article

On the transmission mechanism of Asia‐Pacific yield curve characteristics

Author

Listed:
  • David Gabauer
  • Sowmya Subramaniam
  • Rangan Gupta

Abstract

This study investigates the transmission mechanism of Asia‐Pacific sovereign bond yields using a monthly data set, which reaches over the period from January 2003 until December 2017. Sovereign bond yields are decomposed into three latent factors – level, curvature and slope – using the dynamic Nelson–Siegel procedure proposed by Diebold and Li, Journal of Econometrics, 2006, 130(2), 337–364. The yield curve propagation mechanism is examined using the dynamic connectedness framework of Diebold and Yılmaz, Journal of Econometrics, 2012, 182(1), 119–134 and Diebold and Yılmaz, Journal of Econometrics, 2014, 182(1), 119–134 which is based on a time‐varying parameter vector auto‐regression (TVP‐VAR). The results suggest that the net transmitters of shocks are Australia, Hong Kong, Korea and Singapore whereas China, India, Indonesia, Japan and Malaysia have been net receivers of shocks. Across factors, those results are consistent except for the Korean curvature factor. In addition, findings revealed that the highest market interconnectedness can be found in the level factor followed by the slope and the curvature factor. Notably, all dynamic connectedness indices strongly increased during the Global Financial Crisis (2009), which illustrates that the Asia‐Pacific monetary policy is interconnected with each other especially during periods of economic unrest.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:1:p:473-488
    DOI: 10.1002/ijfe.2163
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/ijfe.2163
    Download Restriction: no
    File URL: https://libkey.io/10.1002/ijfe.2163?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    2. Sowmya, Subramaniam & Prasanna, Krishna & Bhaduri, Saumitra, 2016. "Linkages in the term structure of interest rates across sovereign bond markets," Emerging Markets Review, Elsevier, vol. 27(C), pages 118-139.
    3. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
    4. Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2003. "Common factors in international bond returns," Other publications TiSEM 06a83942-b625-4d3c-808c-a, Tilburg University, School of Economics and Management.
    5. Hyun-Hoon Lee & Hyeon-Seung Huh & Donghyun Park, 2013. "Financial Integration in East Asia: An Empirical Investigation," The World Economy, Wiley Blackwell, vol. 36(4), pages 396-418, April.
    6. Sarno, Lucio & Thornton, Daniel L. & Valente, Giorgio, 2007. "The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(1), pages 81-100, March.
    7. Dewachter, Hans & Lyrio, Marco, 2006. "Macro Factors and the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 119-140, February.
    8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    9. Gregory D. Sutton, 2000. "A defence of the expectations theory as a model of us long-term interest rates," BIS Working Papers 85, Bank for International Settlements.
    10. Chevallier, Julien & Nguyen, Duc Khuong & Siverskog, Jonathan & Uddin, Gazi Salah, 2018. "Market integration and financial linkages among stock markets in Pacific Basin countries," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 77-92.
    11. Holmes, Mark J. & Otero, Jesús & Panagiotidis, Theodore, 2011. "The term structure of interest rates, the expectations hypothesis and international financial integration: Evidence from Asian economies," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 679-689, October.
    12. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    13. Driessen, Joost & Melenberg, Bertrand & Nijman, Theo, 2003. "Common factors in international bond returns," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 629-656, October.
    14. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    15. Cyn-Young Park, 2017. "Developing Local Currency Bond Markets in Asia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(12), pages 2826-2844, December.
    16. Koop, Gary & Korobilis, Dimitris, 2014. "A new index of financial conditions," European Economic Review, Elsevier, vol. 71(C), pages 101-116.
    17. Yang, Jian, 2005. "International bond market linkages: a structural VAR analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(1), pages 39-54, January.
    18. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    19. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    20. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    21. Thomas J Flavin & Margaret J Hurley & Fabrice Rousseau, 2002. "Explaining Stock Market Correlation: A Gravity Model Approach," Manchester School, University of Manchester, vol. 70(S1), pages 87-106.
    22. 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.
    23. Sonali Jain-Chandra & D. Filiz Unsal, 2014. "The effectiveness of monetary policy transmission under capital inflows: Evidence from Asia," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 14(2), pages 96-103, June.
    24. Paramati & Rakesh Gupta & Eduardo Roca, 2015. "Stock market interdependence between Australia and its trading partners: does trade intensity matter?," Applied Economics, Taylor & Francis Journals, vol. 47(49), pages 5303-5319, October.
    25. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    26. Flavin, Thomas J & Hurley, Margaret J & Rousseau, Fabrice, 2002. "Explaining Stock Market Correlation: A Gravity Model Approach," Manchester School, University of Manchester, vol. 70(0), pages 87-106, Supplemen.
    27. Tsukuda, Yoshihiko & Shimada, Junji & Miyakoshi, Tatsuyoshi, 2017. "Bond market integration in East Asia: Multivariate GARCH with dynamic conditional correlations approach," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 193-213.
    28. Vo, Xuan Vinh, 2009. "International financial integration in Asian bond markets," Research in International Business and Finance, Elsevier, vol. 23(1), pages 90-106, January.
    29. Jotikasthira, Chotibhak & Le, Anh & Lundblad, Christian, 2015. "Why do term structures in different currencies co-move?," Journal of Financial Economics, Elsevier, vol. 115(1), pages 58-83.
    30. Kumar, Manmohan S. & Okimoto, Tatsuyoshi, 2011. "Dynamics of international integration of government securities' markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 142-154, January.
    31. Antonakakis, Nikolaos & Gabauer, David & Gupta, Rangan & Plakandaras, Vasilios, 2018. "Dynamic connectedness of uncertainty across developed economies: A time-varying approach," Economics Letters, Elsevier, vol. 166(C), pages 63-75.
    32. Korobilis, D & Yilmaz, K, 2018. "Measuring Dynamic Connectedness with Large Bayesian VAR Models," Essex Finance Centre Working Papers 20937, University of Essex, Essex Business School.
    33. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    34. Engsted, Tom & Tanggaard, Carsten, 2007. "The comovement of US and German bond markets," International Review of Financial Analysis, Elsevier, vol. 16(2), pages 172-182.
    35. Antonakakis, Nikolaos & Gabauer, David, 2017. "Refined Measures of Dynamic Connectedness based on TVP-VAR," MPRA Paper 78282, University Library of Munich, Germany.
    36. Johansson, Anders C., 2008. "Interdependencies among Asian bond markets," Journal of Asian Economics, Elsevier, vol. 19(2), pages 101-116, April.
    37. Tao Wu, 2003. "What makes the yield curve move?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun6.
    38. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
    39. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
    40. Gabauer, David & Gupta, Rangan, 2018. "On the transmission mechanism of country-specific and international economic uncertainty spillovers: Evidence from a TVP-VAR connectedness decomposition approach," Economics Letters, Elsevier, vol. 171(C), pages 63-71.
    41. Thomas J. Fisher & Colin M. Gallagher, 2012. "New Weighted Portmanteau Statistics for Time Series Goodness of Fit Testing," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 107(498), pages 777-787, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ioannis Chatziantoniou & David Gabauer & Hardik A. Marfatia, 2022. "Dynamic connectedness and spillovers across sectors: Evidence from the Indian stock market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(3), pages 283-300, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sowmya, Subramaniam & Prasanna, Krishna & Bhaduri, Saumitra, 2016. "Linkages in the term structure of interest rates across sovereign bond markets," Emerging Markets Review, Elsevier, vol. 27(C), pages 118-139.
    2. Antonakakis, Nikolaos & Gabauer, David & Gupta, Rangan, 2019. "International monetary policy spillovers: Evidence from a time-varying parameter vector autoregression," International Review of Financial Analysis, Elsevier, vol. 65(C).
    3. Stenfors, Alexis & Chatziantoniou, Ioannis & Gabauer, David, 2022. "Independent policy, dependent outcomes: A game of cross-country dominoes across European yield curves," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    4. Chatziantoniou, Ioannis & Gabauer, David & Stenfors, Alexis, 2020. "From CIP-deviations to a market for risk premia: A dynamic investigation of cross-currency basis swaps," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).
    5. Gabauer, David & Gupta, Rangan, 2020. "Spillovers across macroeconomic, financial and real estate uncertainties: A time-varying approach," Structural Change and Economic Dynamics, Elsevier, vol. 52(C), pages 167-173.
    6. Francisco Jareño & Ana Escribano & Zaghum Umar, 2023. "The impact of the COVID-19 outbreak on the connectedness of the BRICS’s term structure," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.
    7. Balcilar, Mehmet & Gabauer, David & Umar, Zaghum, 2021. "Crude Oil futures contracts and commodity markets: New evidence from a TVP-VAR extended joint connectedness approach," Resources Policy, Elsevier, vol. 73(C).
    8. Ioannis Chatziantoniou & David Gabauer & Hardik A. Marfatia, 2022. "Dynamic connectedness and spillovers across sectors: Evidence from the Indian stock market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(3), pages 283-300, July.
    9. Cavaca, Igor Bastos & Meurer, Roberto, 2021. "International monetary policy spillovers: Linkages between U.S. and South American yield curves," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 737-754.
    10. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2020. "Refined Measures of Dynamic Connectedness based on Time-Varying Parameter Vector Autoregressions," JRFM, MDPI, vol. 13(4), pages 1-23, April.
    11. David Gabauer, 2020. "Volatility impulse response analysis for DCC‐GARCH models: The role of volatility transmission mechanisms," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(5), pages 788-796, August.
    12. Bouri, Elie & Cepni, Oguzhan & Gabauer, David & Gupta, Rangan, 2021. "Return connectedness across asset classes around the COVID-19 outbreak," International Review of Financial Analysis, Elsevier, vol. 73(C).
    13. Zhang, Yulian & Hamori, Shigeyuki, 2021. "Do news sentiment and the economic uncertainty caused by public health events impact macroeconomic indicators? Evidence from a TVP-VAR decomposition approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 145-162.
    14. Chatziantoniou, Ioannis & Gabauer, David, 2021. "EMU risk-synchronisation and financial fragility through the prism of dynamic connectedness," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 1-14.
    15. Ghaemi Asl, Mahdi & Adekoya, Oluwasegun Babatunde & Rashidi, Muhammad Mahdi & Ghasemi Doudkanlou, Mohammad & Dolatabadi, Ali, 2022. "Forecast of Bayesian-based dynamic connectedness between oil market and Islamic stock indices of Islamic oil-exporting countries: Application of the cascade-forward backpropagation network," Resources Policy, Elsevier, vol. 77(C).
    16. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2021. "The impact of Euro through time: Exchange rate dynamics under different regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1375-1408, January.
    17. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2021. "A regional decomposition of US housing prices and volume: market dynamics and Portfolio diversification," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 66(2), pages 279-307, April.
    18. Antonakakis, Nikolaos & Gabauer, David & Gupta, Rangan, 2019. "Greek economic policy uncertainty: Does it matter for Europe? Evidence from a dynamic connectedness decomposition approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 535(C).
    19. Umar, Zaghum & Manel, Youssef & Riaz, Yasir & Gubareva, Mariya, 2021. "Return and volatility transmission between emerging markets and US debt throughout the pandemic crisis," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    20. Ioannis Chatziantoniou & David Gabauer & Rangan Gupta, 2021. "Integration and Risk Transmission in the Market for Crude Oil: A Time-Varying Parameter Frequency Connectedness Approach," Working Papers 202147, University of Pretoria, Department of Economics.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:ijfiec:v:27:y:2022:i:1:p:473-488. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/1076-9307/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.