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The Anatomy of the Bond Market Turbulence of 1994

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

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.

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File URL: http://www.levyinstitute.org/pubs/wp159.pdf
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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_159.

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Date of creation: May 1996
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Handle: RePEc:lev:wrkpap:wp_159
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. 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.
  2. Giovannini, Alberto & Piga, Gustavo, 1992. "Understanding the High Interest Rates on Italian Government Securities," CEPR Discussion Papers 720, C.E.P.R. Discussion Papers.
  3. 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.
  4. 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.
  5. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  6. 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.
  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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