Bond Market Spillover Networks during the Global Pandemic: What We Learned from ASEAN-4 Markets

ADBIWorkingPaperSeries BONDMARKETSPILLOVERNETWORKSDURINGTHEGLOBALPANDEMIC:WHATWELEARNEDFROMASEAN-4MARKETS GaziSalahUddin,MuhammadYahya,DonghyunPark,AxelHedström, andShuTian No.1360 February2023 AsianDevelopmentBankInstitute GaziSalahUddinisaprofessoroffinancialeconomicsattheDepartmentofManagementandEngineering,LinköpingUniversity,Sweden.MuhammadYahyaisanassociateprofessoratInlandNorwayUniversityofAppliedSciences,CampusLillehammer,Norway.DonghyunParkisaneconomicadvisor(StrategicKnowledgeInitiatives)attheEconomicResearchandRegionalCooperationDepartment(ERCD),AsianDevelopmentBank(ADB).AxelHedströmisaPhDcandidateattheDepartmentofManagementandEngineering,LinköpingUniversity,Linköping,Sweden.ShuTianisasenioreconomistatERCD,ADB. TheviewsexpressedinthispaperaretheviewsoftheauthoranddonotnecessarilyreflecttheviewsorpoliciesofADBI,ADB,itsBoardofDirectors,orthegovernmentstheyrepresent.ADBIdoesnotguaranteetheaccuracyofthedataincludedinthispaperandacceptsnoresponsibilityforanyconsequencesoftheiruse.TerminologyusedmaynotnecessarilybeconsistentwithADBofficialterms. Discussionpapersaresubjecttoformalrevisionandcorrectionbeforetheyarefinalizedandconsideredpublished. TheWorkingPaperseriesisacontinuationoftheformerlynamedDiscussionPaperseries;thenumberingofthepaperscontinuedwithoutinterruptionorchange.ADBI’sworkingpapersreflectinitialideasonatopicandarepostedonlinefordiscussion.Someworkingpapersmaydevelopintootherformsofpublication. Suggestedcitation: Uddin,G.S.,M.Yahya,D.Park,A.Hedström,andS.Tian.2023.BondMarketSpilloverNetworksduringtheGlobalPandemic:WhatWeLearnedfromASEAN-4Markets.ADBIWorkingPaper1360.Tokyo:AsianDevelopmentBankInstitute.Available:https://doi.org/10.56506/ZDNQ3203 Pleasecontacttheauthorsforinformationaboutthispaper. Email:gazi.salah.uddin@liu.se,muhammad.yahya@inn.no,dpark@adb.org,axel.hedstrom@liu.se,Stian@adb.org GaziSalahUddinisthankfulfortheacademicsupportprovidedbytheAsianDevelopmentBankunderaneducationalresearchgrantofthePrimaryBondInformationPlatforminASEAN+3PrimaryBondTechnicalAssistance.AnearlierversionofthepaperwaspresentedattheLinköpingUniversity,Sweden;attheSchoolofBusiness,NorthSouthUniversity,Bangladesh;andastheinvitedkeynotetalkattheEDTconference,Croatia,andBI-ADBI-APAEAconference,Bali,Indonesia. AsianDevelopmentBankInstituteKasumigasekiBuilding,8thFloor3-2-5Kasumigaseki,Chiyoda-ku Tokyo100-6008,Japan Tel:+81-3-3593-5500 Fax:+81-3-3593-5571 URL:www.adbi.orgE-mail:info@adbi.org ©2023AsianDevelopmentBankInstitute Abstract Duringdecadesofmarketdevelopment,theindividualfinancialmarketsofthemembereconomiesoftheAssociationofSoutheastAsianNations(ASEAN)havebeenprogressivelyincorporatedintoregionalandinternationalmarkets.TheaimofthisstudyistoexploreandmeasurethestrengthanddirectionofthebondmarketconnectednessbetweenIndonesia,Malaysia,thePhilippines,andThailand—collectivelyknownasASEAN-4—andmajorglobalandregionalbondmarketsandtoidentifyvariousfactorsaffectingspillovereffects.Thisstudyderivesariskspillovermeasurebasedontheattributesofstaticanddynamicspillovermodelsandempiricallyexaminesitsroleinreceivingortransmittingshocksbasedondifferentinformationspilloverorcontagionchannels.Inparticular,theobjectiveofthisstudyistoevaluatetheconnectednessdynamicsempiricallyusinggovernmentbondyieldsinASEAN-4markets,majorregionalmarkets(thePeople’sRepublicofChina,Japan,andtheRepublicofKorea),andmajorglobalmarkets(theEuropeanUnion,theUnitedKingdom,andtheUnitedStates).WeaimtoexamineriskspilloversinASEAN-4bondmarketsandidentifythepotentialeconomicandfinancialfundamentalsdrivinguncertaintyspillovers.Wefindcomplexintra-groupreturnandvolatilityconnectednessamongASEAN-4marketsandmoderateinter-groupreturnandvolatilityconnectednessbetweenASEAN-4andregionalandglobalmarketsatdifferenttimehorizons. Keywords:ASEAN-4bondmarkets,COVID-19,spillover,uncertainty,volatility JELClassification:F21,G12,G15,J11,M48,N25,O11 Contents 1.INTRODUCTION1 2.PILLOVERMETHODOLOGY4 2.1TimeDomainNetworkSpilloverFramework4 2.2FrequencyDomainSpillovers5 2.3TimeDomainandFrequencyDomainConnectednessFramework5 3.DATAANDSUMMARYSTATISTICS5 4.EMPIRICALFINDINGS9 4.1ReturnConnectedness9 4.2VolatilityConnectedness13 4.3DynamicSpillovers17 4.4DeterminantsofReturnandVolatilitySpillovers19 5.CONCLUSION22 REFERENCES23 1.INTRODUCTION Duringdecadesofmarketdevelopment,theindividualfinancialmarketsofmembereconomiesoftheAssociationofSoutheastAsianNations(ASEAN)havegraduallybeenincorporatedintoregionalandinternationalmarkets.Meanwhile,ASEANeconomieshavedevelopedstrongtradeconnectednessandinterdependencewithregionalandglobalbusinesscycles.Suchconnectednessmayfosterthespreadofglobalshockstolocalmarketsanddistresslocalfinancialmarkets.Nevertheless,globalshocksexertasymmetricimpactsondifferentmarketsacrossdifferenttimehorizons.Therefore,inthisstudy,weexploreandmeasurethestrengthanddirectionalityofthebondmarketspillovereffectsofASEANeconomieswithmajorglobalandregionalmarketsandidentifyvariousfactorsaffectingtheconnectednessdynamics. Theeconomicmotivationforthispaperisaninit