Bond Volatility Research Articles

Forecasting Chinese Stock Market Volatility With Volatilities in Bond Markets

ABSTRACTIn this paper, we investigate whether the bond markets contain important information that can improve the accuracy of stock market volatility forecasts in China. We use realized volatility (RV) implemented by different maturity treasury bond futures contracts to predict the Chinese stock market volatility. Our work is based on the heterogeneous autoregressive (HAR) framework. Empirical results show that the volatility of treasury bond contracts with longer maturities (especially 10 years) has the best effect on predicting the Chinese stock market volatility, both in sample and out of sample. Two machine learning methods, the scaled principal component analysis (SPCA) and the least absolute shrinkage and selection operator (lasso), are also more effective than the HAR benchmark model's prediction. Finally, mean–variance investors can achieve substantial economic gains by allocating their investment portfolios based on volatility forecasts after introducing treasury bond futures volatility.

Climate policy uncertainty and its impact on the volatility, correlation, and hedging of sovereign and green bonds

This study develops monthly climate policy uncertainty (CPU) indexes for 21 economies and three global CPU indexes to evaluate their effects on the long-term sovereign and green bond volatilities and the long-term sovereign-green bond correlation. Findings show significant increases in the CPU indexes during key climate policy events. Using the extended GARCH-MIDAS-CPU and DCC-MIDAS-CPU models, it finds that CPU significantly affects sovereign bond volatility following the Paris Agreement. Green bonds are more effective as hedging tools in the sovereign bond markets of emerging markets and developing economies than in developed ones, especially post-Paris Agreement. Diversified portfolios including green bonds offer superior hedging effectiveness. This study highlights the pivotal role of green bonds in managing CPU and promoting sustainable development goals.

Heterogeneous impact of economic and political uncertainty on green bond volatility: Evidence from the MRS-GARCH-MIDAS-Skewed T model

Green bonds attract increasing attention as a new eco-friendly investment product. We explore the heterogeneous impact of low-frequency economic and political uncertainty across high or low uncertainty states on green bond volatility in order to accurately analyze the green bond market risk. To this end, we propose a new Markov regime switching GARCH-MIDAS-Skewed T model, in which the regime switching behavior occurs on the low-frequency long-term volatility. An effective filtering estimation method is put forth by introducing the likelihood of the low-frequency sub-sample set. The evidence supports that there are significant time-varying and state-dependent impacts from uncertainty shocks on the volatility of green bonds, including monetary policy, inflation, and crude oil prices as well as global economic policy and political environment. In addition, we find the counter-cyclical behavior of green bond volatility, which increases in the period of economic recession or financial turbulence with expanding uncertainty. Improving the hedging ability of green bonds against uncertainty risks effectively contributes to low-carbon economic development.

Does time-varying risk aversion sentiment matter in the connectedness among Sub-Saharan African bond markets?

Several bond markets in sub-Saharan Africa (SSA) are defaulting due to hiking spreads amid the stressed states introduced by the COVID-19 pandemic and the geopolitical risk tensions from the Russia-Ukraine conflict. Are there controllable factors that drive these markets? We investigate the dynamic connection shared by SSA bond markets and assess the role of investor sentiment measures, focusing on the risk aversion sentiment of international investors. Our results, across different trading horizons, are expected to aid in the formulation of policies for regulating and developing bond markets of emerging economies, particularly SSA. In terms of both return and volatility of SSA bonds, we find risk aversion sentiment an important transmitter of spillover for all investment horizons.

Gauging the dynamic interlinkage level between Fintech and the global blue economy performance

PurposeWe investigate connections between the development of Fintech and the blue economy from September 14th, 2020, to August 11th, 2023.Design/methodology/approachIn this research, we use a cutting-edge model-free connectedness approach to investigate the relationships between FinTech and blue bond volatility. Our work is the first to investigate the effects of unknown events, such as the COVID-19 pandemic and Ukraine–Russia conflicts, on the interconnection of volatility derived from FinTech development and blue bond volatility.FindingsOur results highlight the two-way relationship between the development of Fintech and the blue economy during our sample period. The net total connectedness shows that the blue economy index is a net shock receiver, especially in late 2021 and the second half of 2022, while most of the fintech indexes in our sample are mainly net shock transmitters. The Ukraine–Russia tension threatens the development of a sustainable blue economy. The development of Fintech plays an important role in promoting the blue economy.Practical implicationsOur results have important policy implications for investors and governments, as well as methods from the spillovers across the various indicators and their interconnections. Sharp information on the primary contagions among these indicators aids politicians in designing the most appropriate policies.Originality/valueOur paper contributes to the literature in at least four ways. First, as previously stated, our article is the first to investigate the relationship between FinTech and blue bond volatility. Second, this study presented a framework for studying volatility interconnections between distinct variables that is more suited to analyzing these interconnections. In this research, we use a cutting-edge model-free connectedness approach to investigate the relationships between FinTech and blue bond volatility. Third, our work is the first to investigate the effects of unknown events such as the COVID-19 pandemic and Ukraine–Russia conflicts on the interconnection of volatility deriving from FinTech development and blue bond volatility. Lastly, our research provides a daily dataset for the BNP Paribas Easy ECPI Global ESG Blue Economy UCITS ETF to analyze 50 businesses from various markets that are at the forefront of the responsible application of ocean resources and other ESG standards. The Global X FinTech ETF (FINX) and the ARK FinTech Innovation ETF (ARKF) seek exposure to companies developing financial technology innovations. The development sectors include insurance, investment, fundraising and third-party lending by utilizing cutting-edge mobile and digital technologies. Our time series runs from September 14th, 2020, to August 11th, 2023. By using this database, we provide a comprehensive analysis of the link between the volatilities arising from various markets.

Does ownership concentration affect corporate bond volatility? Evidence from bond mutual funds

This paper examines the link between ownership concentration and corporate bond volatility. We show that more concentrated mutual fund ownership is associated with higher volatility of corporate bonds. This relation is stronger among more illiquid bonds, during periods of heightened bond market illiquidity, and among bonds held by corporate bond funds that invest in more illiquid bonds and experience higher or more correlated liquidity shocks. Using a sample of mutual fund mergers, we further show that increases in bond volatility are unlikely to be driven entirely by the endogenous ownership structure of corporate bonds. Our findings suggest that the concentrated ownership by corporate bond mutual funds provides another channel, apart from illiquidity, to help explain the excess volatility in corporate bonds.

Can green bond hedges climate policy uncertainty in the United States: New insights from novel time-varying causality and quantile-on-quantile methods?

Climate policy uncertainty (CPU) raises concerns about financial instability and creates several macroeconomic challenges for the United States. Therefore, hedging against climate policy uncertainty risk is essential for formulating appropriate policies for efficient risk management. This study explores the relationship between climate policy uncertainty and green bonds, evaluating whether green bonds can hedge climate policy uncertainty risk and enhance the stability of the United States’ climate policy environment. Against this background, bootstrap full-sample and subsample rolling-window Granger causality tests are employed to investigate the mutual influences between climate policy uncertainty and green bonds (measured by GBI). The positive impact of climate policy uncertainty on green bonds highlights that green bonds can mitigate uncertainty risks. However, this perspective cannot be confirmed through negative influences, as the green bond market is also determined by public confidence and speculative bubbles. Therefore, the characteristics of instability reveal that green bonds should not always be used to hedge against climate uncertainty risks in the United States. These results are supported by the general equilibrium model, which underscores a certain impact of climate policy uncertainty on green bonds. In turn, the positive influence of green bonds on climate policy uncertainty indicates that the green bond market can provide insights into predicting climate policy uncertainty. Additionally, using the quantile-on-quantile (QQ) method reveals a mutual influence between climate policy uncertainty and green bonds in short, medium, and long term. Under severe extreme weather conditions and complex economic environments, investors and government can benefit from the green bond market to optimize their investments. However, they should mitigate potential risks associated with green bond volatility to avoid significant losses and reduce climate policy uncertainty.

ESG Performance and Corporate Bond Volatility

ESG Performance and Corporate Bond Volatility

Unraveling the impact of female CEOs on corporate bond markets

AbstractLittle is known about how executive gender shapes the inherent conflict of interest between shareholders and bondholders. Using a sample of almost 100,000 unique bond‐year observations, this study investigates how the appointment of female chief executive officers (CEOs) lowers the default outlook. Our evidence indicates that bond yield and bond volatility are significantly lower after a female takes the helm at a firm. This executive gender effect remains highly statistically and economically significant across various robustness checks and after addressing endogeneity concerns. Female CEOs lower the default risk component of the bond yield but have no material impact on the liquidity component. Subsample analysis substantiates the conditional effect of female CEOs on bond yield and bond volatility. Our evidence indicates that female CEOs’ risk‐averse attributes pass through the credit risk and information asymmetry channels.

The Volatility of Green and Non-green Sovereign Bonds on the Emerging EU Markets

The Volatility of Green and Non-green Sovereign Bonds on the Emerging EU Markets

Climate policy uncertainty risk and sovereign bond volatility

This study investigates the relationship between climate policy uncertainty (CPU) risk and the volatility of sovereign bond return (SBV) in 43 economies from 2012 to 2021. It also innovatively examines how the volatility and asymmetry of CPU affect SBV. The study utilizes the GARCH-MIDAS model to handle mixed-frequency data and applies the DCC-GARCH and TVP-VAR-DY models to investigate dynamic correlations and spillover effects. The empirical results show that CPU negatively impacts SBV, while CPU's volatility or positive shocks tend to elevate SBV, especially in more climate-resilient developed economies. In addition, critical international events can influence dynamic correlations and spillover effects between CPU (or its volatility) and SBV, particularly when climate policy is highly valued. From a risk transmission standpoint within the sovereign bond system, CPU and its volatility exert positive net spillover effects on SBV in the majority of economies. This study offers valuable insights for investors and policymakers, aligning with the goals of sustainable development for effective management of CPU risks.

Do geopolitical risk, economic policy uncertainty, and oil implied volatility drive assets across quantiles and time-horizons?

This paper examines the impact of three global risk factors (geopolitical risk (GPR), economic policy uncertainty (EPU), and crude oil volatility (OVX)) on the returns and variance of commodity, Islamic stock, and green bond markets across quantile distributions and various time horizons. To this end, Granger causality tests in quantiles and distributions along with wavelet-based correlation and causality approaches are applied to daily data from February 1, 2013 to June 30, 2023. The results of the Granger causality in quantiles tests show strong evidence that all three global risk factors Granger-cause returns across all quantiles, except the lowest and middle quantiles. The Granger causality is significant for both returns and variances, where GPR is the least predictor and OVX is the most predictor. Evidence of causation in risk spillovers is in the right tail and center of the distribution rather than the left tail, indicating no evidence of down-to-down risk spillover. The upside risk of OVX causes both the upside and downside risk of asset returns. The positive volatility of EPU and GPR drives the positive and negative volatility of the green bond and Islamic stock markets, respectively. Green bond markets are completely immune to risk spillover from geopolitical risks. The effects of risk factors are negligible at the lower and somewhat middle quantiles but strengthen with varying magnitude and significance for the remaining quantiles. The results of the wavelet analysis indicate that asset returns co-move with the global risk factors in the short term but decouple in the longer term. Risk factors exert short-lived causal impacts in the short term, but the duration of significant causal periods rises with time and the effect intensifies during crisis periods.

Funding liquidity risk and the volatility of U.S. municipal green bonds during the COVID-19 pandemic

This study adopts the funding liquidity–market liquidity model developed by Brunnermeier and Pedersen (2009) to investigate the relationship between funding liquidity risk and the volatility of U.S. municipal green bonds during the COVID-19 crisis, while also accounting for other potential risk factors. We observe that during high levels of municipal green bond volatility, the effect of funding liquidity risk on volatility is more pronounced than during periods of low municipal green bond volatility. Moreover, the response of municipal green bond volatility to a shock in the funding liquidity risk is stronger compared to a shock in other risk factors.

The impact of retail investor sentiment on the conditional volatility of stocks and bonds: Evidence from the Tel-Aviv stock exchange

We measured bond and stock conditional return volatility as a function of changes in sentiment, proxied by six indicators of the Tel-Aviv Stock Exchange. We found that changes in sentiment affect conditional volatilities at different magnitudes and often in an opposite manner in the two markets, subject to market states. We are the first to measure the bond conditional return volatility of retail investor sentiment, thanks to a unique dataset from a limit-order book with highly active retail traders. This market structure differs from the prevalent over-the-counter platforms, where institutional investors are active, yet less prone to sentiment.

Dynamic Interdependence Between Volatility of Shariah Stock and Bond

Dynamic Interdependence Between Volatility of Shariah Stock and Bond

From climate risk to the returns and volatility of energy assets and green bonds: A predictability analysis under various conditions

The importance of climate risk as a source of systemic risk for financial markets and the decisions of investors, portfolio managers, and regulators is growing. We examine the directional predictability from two climate risk measures, transition risk and physical risk, to the returns and volatility of European brown and green energy stocks, European carbon emission allowances, and global green bonds. Using daily data, we apply a cross-quantilogram approach in a time-varying setting to measure potential differences in the predictability across quantiles and over various crisis periods. The return predictability results are more pronounced for transition risk than physical risk, especially for brown energy stocks and carbon emission allowances, and they generally vary across periods and markets conditions. The predictability of volatility is also significant at specific time periods and volatility states, especially from transition risk, and the sign of the predictability is positive for brown energy and carbon emission allowances whereas it is negative for green bonds. We show that a lower-than-expected level of discussion about the transition process leads to a heightened volatility of brown energy markets. These findings have important implications regarding climate risks assessment on return and volatility predictability and climate risk and portfolio decarbonization under COP26.

The Volatility of 10-Year Government Bonds in the Period of Increased Economic Uncertainty

Within the scope of this paper is to investigate the dynamic correlation and the volatility of 10-year sovereign bond yields in the G7 countries from January 4, 2010 to December 30, 2022. The following analyses were performed by dividing the said period into two sub-periods taking August 2, 2019 as a breaking point. Conclusions were made based on built VAR models. Conducted research indicates the USA as having the most significant influence on the rest of countries. European countries are perceived as more vulnerable to the external impact in shaping their bond yields. There are noticeable changes taking place in Italy between analyzed two periods – quotes become more dependent on other countries over time.

Do foreign investors affect the volatility of local currency bond prices? Empirical evidence from China

How does the participation of foreign investors on local bond markets impact the volatility of bond prices and yields? An answer to this question is important for policy makers from emerging markets in their attempts to liberalize access to financial markets. However, empirical literature gives inconclusive answers to this question. Reasons are that studies analyze diverse types of bonds and apply their analyses to different samples of countries and for different phases in the opening up of markets. We add to existing knowledge by empirically investigating the impact of foreign investors' participation on the volatility of prices of two types of Chinese bonds, government bonds and policy bank bonds, as well as for three stages in the liberalization of the Chinese bond market. We find that foreign investors' participation does not exert significant effects on volatility until late in the opening of the bond market. In addition, we uncover that those bonds which are more influenced by government policies, policy bank bonds, are also more strongly affected by international capital flows. From a policy perspective, our results emphasize the importance of increasing the openness of China's local currency bond market, of stabilizing foreign investors' expectations and, in turn, international capital flows.

The impact of EPU spillovers on the bond market volatility: Global evidence

This paper studies the effect of economic policy uncertainty (EPU) spillovers from other countries on local bond market volatility. Using multivariate quantile model (White et al., 2015), we develop a country-specific EPU spillover measure for 23 economies from 2003 to 2019. We find that EPU spillovers have a significantly positive effect on local bond market volatility. This effect becomes stronger if the spillovers are from developed markets and when the spillovers are measured during financial crises. Recognizing the relation between EPU spillovers and bond volatility can motivate policy makers to closely monitor foreign EPU and take actions to alleviate the detrimental influence when foreign EPU rises.

Municipal bond volatility spillover modeling with COVID-19 effects by hybrid integration of GARCH and machine learning: The connectedness of U.S. states and South African bond markets

After the passage of the United States Africa Growth and Opportunity Act (AGOA), the emerging market economy of South Africa (SA) recorded substantial increases in duty-free exports to the U.S. Any loss or disruption of AGOA privileges could undermine SA as a trade partner with designated states in the U.S. For U.S. states most affected by the passage of the 2017-2018 Tax Cuts and Jobs Act (e.g., SALT states) along with the COVID-19 pandemic effects, the elimination of the tax exemption impacted how state governments assist in funding international trade. This paper presents a novel hybrid EGARCH conditional volatility and artificial neural network model to map the COVID-19 effect on volatility spillovers between the SA government bond market and state-issued U.S. municipal bonds traded in secondary markets. Our empirical investigation provides three innovations. First, this study addresses illiquidity and informed trading impairments by observing over 11.5 million municipal bond trades. Second, we provide new evidence that a radial basis function artificial neural network enhanced by conditional volatility and fundamental factors can effectively map the geographical bond market spillover transmission between SA and individual U.S. states. Third, on state-based muni trades, we report how the AR (1) process is weighted positively across all East coast states during the global pandemic. Lastly, the study details how COVID-19 and South African conditional volatility impacted the returns of recorded trades of municipal bonds in SALT states. A global summary of the findings concludes with a discussion of how precious metals trading contributes to the performance of state-based municipal bonds.