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Unconventional Monetary Policy and Bond Market Connectedness in the New Normal

Author

Listed:
  • Umut Akovali

    () (Koc University)

  • Kamil Yilmaz

    () (Koc University)

Abstract

Since the global financial crisis, major central banks gradually switched to unconventional monetary policies (UMPs) as part of their efforts to directly influence the long-term interest rates. This study analyzes the impact of conventional/unconventional monetary policies on sovereign bond return spillovers across countries and maturities since February 2007. Following the Taper Tantrum of mid-2013 and the ECB’s policy convergence to other major central banks in 2015, the long-term return connectedness across countries increased, overtaking the short-term connectedness and lowering the dispersion of connectedness measures across maturities. Over the same period, net connectedness from short- to long-term maturities weakens, while net connectedness from medium- to long-term maturities stays strong. Finally, panel regression results show that UMPs in the form of higher central bank asset ratios led to higher pairwise long-term return connectedness even when the control variables such as trade and portfolio investment flows and the distance between pairs of countries are included in regression analysis.

Suggested Citation

  • Umut Akovali & Kamil Yilmaz, 2021. "Unconventional Monetary Policy and Bond Market Connectedness in the New Normal," Koç University-TUSIAD Economic Research Forum Working Papers 2101, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:2101
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    More about this item

    Keywords

    Unconventional monetary policy; quantitative easing; yield curve; vector autoregression; variance decomposition; elastic net.;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • 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
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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