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The Anatomy of the Bond Market Turbulence of 1994


  • Claudio E.V. Borio

    (The Jerome Levy Economics Institute)

  • Robert N. McCauley

    (The Jerome Levy Economics Institute)


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 holdings of bonds." The authors found that spillover effects were not a factor that could explain the general rise in bond market volatility. Borio and McCauley also investigate other factors that might contribute to bond market volatility. They find some evidence that uncertainties about monetary and fiscal policies were sources of volatility. Changing expectations and domestic economic factors (such as the inflation record or volatility in the money market), however, did not appear to explain volatility.

Suggested Citation

  • Claudio E.V. Borio & Robert N. McCauley, 1998. "The Anatomy of the Bond Market Turbulence of 1994," Macroeconomics 9809004, EconWPA, revised 24 Feb 1999.
  • Handle: RePEc:wpa:wuwpma:9809004
    Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 25; figures: included

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    References listed on IDEAS

    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.
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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. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    3. McCauley, R.N., 1997. "The Euro and the Dollar," Princeton Essays in International Economics 205, International Economics Section, Departement of Economics Princeton University,.
    4. 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.

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    • E - Macroeconomics and Monetary Economics

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