Asymmetric Spillovers in ASEAN Bond Markets

ASYMMETRICSPILLOVERSINASEANBONDMARKETS MuhammadYahya,TianqiLuo,GaziSalahUddin,DonghyunPark,ShuTian,andRanadevaJayasekera NO.697 October2023 ADBECONOMICSWORKINGPAPERSERIES ASIANDEVELOPMENTBANK ADBEconomicsWorkingPaperSeries AsymmetricSpilloversinASEANBondMarkets MuhammadYahya,TianqiLuo,GaziSalahUddin,DonghyunPark,ShuTian,andRanadevaJayasekera TheADBEconomicsWorkingPaperSeriespresentsresearchinprogresstoelicitcommentsandencouragedebateondevelopmentissuesinAsiaandthePacific.TheviewsexpressedarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesofADBor itsBoardofGovernorsorthegovernmentstheyrepresent. No.697|October2023 MuhammadYahya(muhammad.yahya@inn.no)isanassociateprofessoratInlandNorwayUniversityofAppliedSciences.RanadevaJayasekera(jayasekr@tcd.ie)isaprofessorand TianqiLuo(luot@tcd.ie)isaPhDstudentatTrinityCollegeDublin.GaziSalahUddin(gazi.salah.uddin@liu.se)isanassociateprofessoratLinköpingUniversity.DonghyunPark(dpark@adb.org)isaneconomicadvisorandShuTian(stian@adb.org) isasenioreconomistattheEconomicResearchandDevelopmentImpactDepartment,AsianDevelopmentBank. ASIANDEVELOPMENTBANK CreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO) ©2023AsianDevelopmentBank 6ADBAvenue,MandaluyongCity,1550MetroManila,PhilippinesTel+63286324444;Fax+63286362444 www.adb.org Somerightsreserved.Publishedin2023. ISSN2313-6537(print),2313-6545(electronic)PublicationStockNo.WPS230389-2 DOI:http://dx.doi.org/10.22617/WPS230389-2 TheviewsexpressedinthispublicationarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesoftheAsianDevelopmentBank(ADB)oritsBoardofGovernorsorthegovernmentstheyrepresent. ADBdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilityforanyconsequenceoftheiruse.ThementionofspecificcompaniesorproductsofmanufacturersdoesnotimplythattheyareendorsedorrecommendedbyADBinpreferencetoothersofasimilarnaturethatarenotmentioned. Bymakinganydesignationoforreferencetoaparticularterritoryorgeographicarea,orbyusingtheterm“country”inthispublication,ADBdoesnotintendtomakeanyjudgmentsastothelegalorotherstatusofanyterritoryorarea. ThispublicationisavailableundertheCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)https://creativecommons.org/licenses/by/3.0/igo/.Byusingthecontentofthispublication,youagreetobeboundbythetermsofthislicense.Forattribution,translations,adaptations,andpermissions,pleasereadtheprovisionsandtermsofuseathttps://www.adb.org/terms-use#openaccess. ThisCClicensedoesnotapplytonon-ADBcopyrightmaterialsinthispublication.Ifthematerialisattributedtoanothersource,pleasecontactthecopyrightownerorpublisherofthatsourceforpermissiontoreproduceit.ADBcannotbeheldliableforanyclaimsthatariseasaresultofyouruseofthematerial. Pleasecontactpubsmarketing@adb.orgifyouhavequestionsorcommentswithrespecttocontent,orifyouwishtoobtaincopyrightpermissionforyourintendedusethatdoesnotfallwithintheseterms,orforpermissiontousetheADBlogo. CorrigendatoADBpublicationsmaybefoundathttp://www.adb.org/publications/corrigenda.Notes: Inthispublication,“$”referstoUnitedStatesdollars. ADBrecognizes“China”asthePeople’sRepublicofChinaand“US”astheUnitedStates. ABSTRACT ThefinancialmarketsofmembersoftheAssociationofSoutheastAsianNations(ASEAN)havebecomeincreasinglyintegratedwithregionalandglobalmarkets.ASEANeconomiesalsoexhibitstrongtradeconnectednessandinterdependencewithregionalandglobalbusinesscycles.SuchconnectednesscanfosterthespreadofglobalshockstoASEANmembersanddistresslocalfinancialmarkets.Globalshocks,suchasfinancialcrisesorcommoditypricechanges,canhaveasymmetricandnonlineareffectsonotherfinancialandcommoditymarketsaroundtheworld.ThispaperaimstoestimateandevaluatetheintensityanddirectionalityofbondmarketconnectednessbetweenASEANandmajorregionalandglobalmarkets.Furthermore,weaimtoidentifyfactorsimpactingtheinterconnectednessdynamicsamongthesemarkets.Thisstudyderivesanuncertaintyconnectednessmeasuregroundedontheattributesofstaticanddynamicdependenceframeworksandempiricallyevaluatesitsroleintransmittingorreceivingshocksbasedonvariousinformationspilloverandcontagionchannels.Thefindingsofthisstudyhaveimportantimplicationsformarketparticipants,regulators,andpolicymakers. Keywords:asymmetricspillover,uncertainty,connectedness,ASEAN JELcodes:E52,E58,F42 1.INTRODUCTION Sincethedebtcrisisintheeuroarea,whichbeganin2009,sovereignbondyieldspillovershavebeenacrucialtopicforpolicymakers,riskregulators,andinvestors.Thelinkagesbetweensovereignbondsareconsideredpotentialthreatstofinancialstability.GiventhattheEuropeandebtcrisis,whichwascenteredonsovereignbonds,wasexacerbatedbytheeffectsoftheglobalfinancialcrisis,similarly,today’smarketparticipantsareworryingthattherewillbeanewdebtcrisisinthepost-pandemicera.Therefore,inthisstudy,weutilizedatafromAssociationofSoutheastAsianNations(ASEAN)bondmarketsandmajorglobalfinancialmarketstoevaluatetheasymmetricnetworkconnectednessamongthesemarkets.Thisisimportantgiventheincreaseddivergenceofinvestmentsfromtraditionalbondandfinancialmarketstoemergingmarketssucha