IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Anatomy of the Bond Market Turbulence of 1994

Listed author(s):
  • Claudio E. V. Borio
  • Robert N. McCauley

According to Claudio E. V. Borio and Robert N. McCauley, "the bond market sell-off of 1994 has begun to show up on lists of market events against which risk management systems are judged." Examples of other such events are the 1987 stock market crash and the 1995 Kobe earthquake. However, there has been little analysis of the cause of the 1994 decline. Borio and McCauley fill the void by examining a number of factors that might explain the rise in volatility during that year. The authors investigate four types of one such factor, market dynamics: volatility persistence, relationships in the direction of market movements, foreign disinvestment, and volatility spillover effects from other markets. Borio and McCauley found that persistence had strong explanatory power. The implied bond volatility in two successive weeks accounted for 58 to 93 percent of the variance in volatility. They found "strong but not ubiquitous evidence" that a rise in bond yields led to higher volatility. In the United States and Canada they found no relationship between bond prices and volatility. In Japan, Sweden, and Spain, however, they found a symmetrical directional relationship, that is, increases or decreases in bond yields resulted in similar increases in volatility. In the remaining eight countries they studied, they found a partial directional relationship between volatility and bond prices, that is, volatility rose when bond yields rose, but did not respond when yields fell by a similar amount. The authors offer several possible explanations for the apparent directionality of volatility, including asymmetries in inflation risks and options trading strategies. Borio and McCauley found that international capital flows played a role in the rise in bond volatility in 1994, especially for European countries that experienced a sell-off of government bonds. The sell-off, the authors explain, reflects "the greater proclivity among foreign investors to leverage their

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_159.

in new window

Date of creation: May 1996
Handle: RePEc:lev:wrkpap:wp_159
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  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. 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, the United States, and Great Britain," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 4-16.
  5. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
  6. 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.
  7. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_159. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Celeste Edwards)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.