Abstract
Our study provides new evidence on asymmetric dependencies in international government bond markets, by examining bonds from developed, emerging, and frontier countries, using a quantile regression methodology. We find that the dependence structure for emerging and frontier markets significantly changes during financial crisis periods, which we show has important implications for international diversification of investment strategies. Moreover, we also examine in detail stock-bond correlations and uncover several instances of decoupling. In contrast, developed markets exhibit a more stable dependence pattern. In addition, we document that the degree and structure of dependence vary when foreign currencies are hedged or unhedged, and across bond maturity segments.
Highlights
We examine the degree and structure of dependence in international government bond markets
We investigate whether the dependence structure is asymmetric and affected by the 2007–2008 global financial crisis and Eurozone debt crisis, and what is the role of bond maturity
We examine the currency aspect in the analysis of dependence structure by using: (i) returns converted to US dollar (USD), (ii) returns hedged to USD using currency derivatives, and (iii) returns on USD-denominated government bonds
Summary
We examine the degree and structure of dependence in international government bond markets. We examine the degree and structure of dependence for three categories of government bond markets (developed, emerging, and frontier) relative to global bond market. Previous studies on stock–bond correlations in emerging markets concentrated on co-movement be tween stocks and bonds within individual emerging countries and analyzing factors that affect co-movement (Li and Zou, 2008, Panchenko and Wu, 2009; Christopher et al, 2012; Bianconi et al, 2013; Dimic et al, 2016) We extend this line of research by focusing on the co-movement between global stock market and three different categories of bond markets (emerging, frontier, and developed) while incorporating currency and hedging aspects, and testing for flight-to-quality and contagion during the global financial crisis and the Eurozone debt crisis.
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