Bond market spillover networks of ASEAN-4 markets: Is the global pandemic different?

Abstract

This study explores the interconnectedness of bond markets in the Association of Southeast Asian Nations (ASEAN-4: Indonesia, Malaysia, the Philippines, and Thailand) with significant regional and global markets, focusing on transmitting global shocks to these markets. The analysis is based on the forecast error variance decomposition (FEVD) of a vector autoregression (VAR) model and wavelet-based longer horizon approaches, enabling us to identify the net transmitter and receiver of return and volatility shocks among the underlying markets at various investment horizons. In addition, we evaluate the primary drivers of ASEAN-4 bond markets, employing global and ASEAN-4 macroeconomic indicators and uncertainty measures to explain variations in the spillover dynamics. Empirical findings reveal strong inter-country connectedness among bond markets, with the U.S. market having the most significant links for 7- and 10-year bond maturities. However, there is limited connectedness within ASEAN-4 and other developing countries, indicating strong diversification potential. Furthermore, our findings indicate increased interconnectedness during COVID-19 and that macroeconomic fundamentals significantly influence the ASEAN-4 markets, rationalizing the heterogeneous cross-border transmission of uncertainty shocks. The findings contribute to the literature on bond market spillovers, offering valuable insights for policymakers, regulators, and investors seeking portfolio diversification, risk management, and sustainable growth in the ASEAN-4 markets.