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Financial uncertainty and interest rate movements: is Asian bond market volatility different?

Author

Listed:
  • Jungsuk Kim

    (Sejong University)

  • Abhishek Kumar

    (Indira Gandhi Institute of Development Research)

  • Sushanta Mallick

    (Queen Mary University of London)

  • Donghyun Park

    (Asian Development Bank)

Abstract

The COVID-19 pandemic has given rise to a spike in financial market volatility. In this paper, we attempt to assess the effects of financial & news-driven uncertainty shocks in growing Asian economies, using country-specific bond volatility shocks as a measure of local interest rate uncertainty. Also, we contrast the effects of local uncertainty with global stock market uncertainty. Using bond market data from nine Asian markets, we uncover a transmission mechanism of uncertainty shocks via the bond market. The mechanism works as a crowding-out effect due to government-led excessive market borrowing with supply-side consequences for the private sector, as opposed to economic policy or global stock market uncertainty which works more like a demand shock as in the literature. We conclude that countries with growing fiscal deficits that entail a larger government bond market or higher current account deficits, tend to experience an increase in the cost of borrowing due to this bond market volatility or interest rate uncertainty shocks.

Suggested Citation

  • Jungsuk Kim & Abhishek Kumar & Sushanta Mallick & Donghyun Park, 2024. "Financial uncertainty and interest rate movements: is Asian bond market volatility different?," Annals of Operations Research, Springer, vol. 334(1), pages 731-759, March.
    • Handle: RePEc:spr:annopr:v:334:y:2024:i:1:d:10.1007_s10479-021-04314-7
    DOI: 10.1007/s10479-021-04314-7
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    Keywords

    Penalty function; Emerging Asia; Uncertainty; Bond market volatility; SVAR; Supply shock; Demand shock;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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