Macroeconomic factors and conditional bond volatility: evidence from emerging and developed bond markets

Karthika S. Nair and M. Thenmozhi

American Journal of Finance and Accounting, 2012, vol. 2, issue 4, 326-345

Abstract: This study investigates the effect of macroeconomic factors on the conditional volatility of developed and emerging bond markets using ARMA-GARCH model and examines the effect of macroeconomic factors themselves rather than the effect of announcement of macroeconomic factors. The findings show that the macroeconomic factors exhibit a significant relationship with volatility in all the bond markets, more specifically in the emerging bond markets. It is found that past lags explain bond volatility in India, Brazil, USA, UK and Japan, which reasserts that the assumptions of random walk hypothesis does not hold true and bond markets are predictable in the long run. The predictive power of macroeconomic variables and ARMA terms is high in the Indian and Brazilian bond market compared to the developed bond markets. The study shows that, similar to the equity market, the bond market too incorporates information on economic activity and it is more significant in emerging markets.

Keywords: bond markets; conditional bond volatility; macroeconomics; GARCH; market efficiency; emerging markets. (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:ids:amerfa:v:2:y:2012:i:4:p:326-345

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