Financial uncertainty and interest rate movements: is Asian bond market volatility different?

Jungsuk Kim (), Abhishek Kumar (), Sushanta Mallick () and Donghyun Park
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Jungsuk Kim: Sejong University
Abhishek Kumar: Indira Gandhi Institute of Development Research
Sushanta Mallick: Queen Mary University of London

Annals of Operations Research, 2024, vol. 334, issue 1, No 27, 759 pages

Abstract: Abstract The COVID-19 pandemic has given rise to a spike in financial market volatility. In this paper, we attempt to assess the effects of financial & news-driven uncertainty shocks in growing Asian economies, using country-specific bond volatility shocks as a measure of local interest rate uncertainty. Also, we contrast the effects of local uncertainty with global stock market uncertainty. Using bond market data from nine Asian markets, we uncover a transmission mechanism of uncertainty shocks via the bond market. The mechanism works as a crowding-out effect due to government-led excessive market borrowing with supply-side consequences for the private sector, as opposed to economic policy or global stock market uncertainty which works more like a demand shock as in the literature. We conclude that countries with growing fiscal deficits that entail a larger government bond market or higher current account deficits, tend to experience an increase in the cost of borrowing due to this bond market volatility or interest rate uncertainty shocks.

Keywords: Penalty function; Emerging Asia; Uncertainty; Bond market volatility; SVAR; Supply shock; Demand shock (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10479-021-04314-7

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