Financial uncertainty and interest rate movements: is Asian bond market volatility different?

Kim, Jungsuk, Kumar, Abhishek, Mallick, Sushanta and Park, Donghyun (2021) Financial uncertainty and interest rate movements: is Asian bond market volatility different? Annals of Operations Research, 334, 731-759. (doi:10.1007/s10479-021-04314-7).

Abstract

The COVID-19 pandemic has given rise to a spike in financial market volatility. In this paper, we attempt to assess the effects of financial & news-driven uncertainty shocks in growing Asian economies, using country-specific bond volatility shocks as a measure of local interest rate uncertainty. Also, we contrast the effects of local uncertainty with global stock market uncertainty. Using bond market data from nine Asian markets, we uncover a transmission mechanism of uncertainty shocks via the bond market. The mechanism works as a crowding-out effect due to government-led excessive market borrowing with supply-side consequences for the private sector, as opposed to economic policy or global stock market uncertainty which works more like a demand shock as in the literature. We conclude that countries with growing fiscal deficits that entail a larger government bond market or higher current account deficits, tend to experience an increase in the cost of borrowing due to this bond market volatility or interest rate uncertainty shocks.

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Contributors

Author: Abhishek Kumar

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