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The anatomy of the bond market turbulence of 1994

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  • Claudio E. V. Borio
  • Robert N. McCauley

Abstract

This paper examines the sharp rise in bond yield volatility across the major bond markets in 1994. The analysis covers thirteen industrialised countries and is largely based on OTC data for implied bond yield volatility. We conclude that the market's own dynamics seem to provide a stronger explanation than variations in market participants' apprehensions about economic fundamentals. We identify three market dynamics: downward markets increase volatility; volatility spills over from certain markets onto others; and it can rise in the wake of substantial withdrawals of foreign investments. We find more limited evidence that monetary or fiscal policies accounted for the rise in volatility, at least by our measures. Moreover, changing expectations about growth and inflation, while perhaps at work in particular countries, do not offer much of a general explanation.

Suggested Citation

  • Claudio E. V. Borio & Robert N. McCauley, 1995. "The anatomy of the bond market turbulence of 1994," BIS Working Papers 32, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:32
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    References listed on IDEAS

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    1. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
    2. Hentschel, Ludger, 1995. "All in the family Nesting symmetric and asymmetric GARCH models," Journal of Financial Economics, Elsevier, vol. 39(1), pages 71-104, September.
    3. Gikas A. Hardouvelis, 1988. "Evidence on stock market speculative bubbles: Japan, United States and Great Britain," Research Paper 8810, Federal Reserve Bank of New York.
    4. Gikas A. Hardouvelis, 1988. "Evidence on stock market speculative bubbles: Japan, the United States, and Great Britain," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 4-16.
    5. Giovannini, Alberto & Piga, Gustavo, 1992. "Understanding the High Interest Rates on Italian Government Securities," CEPR Discussion Papers 720, C.E.P.R. Discussion Papers.
    6. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    7. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
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    Cited by:

    1. J. Boeckx & N. Cordemans & M. Dossche, 2013. "Causes and implications of the low level of the risk-free interest rate," Economic Review, National Bank of Belgium, issue ii, pages 63-88, September.
    2. McCauley, R.N., 1997. "The Euro and the Dollar," Princeton Essays in International Economics 205, International Economics Section, Departement of Economics Princeton University,.
    3. Ábel, István, 2015. "A monetáris politika globális tendenciái és a stabilitási kockázatok
      [Financial stability concerns and global exposure of monetary policy]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 284-304.
    4. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.

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