Article
To read the full-text of this research, you can request a copy directly from the authors.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... The issue of international bond market co-movement dynamics is of great importance to investment practitioners and policy makers. Investment practitioners pay close attention to the comovement between bond markets since a proper grasp of its nature and measurement affects international diversification because when markets are in turmoil, international portfolio diversification becomes less effective (Clare, Maras, & Thomas, 1995). On the other hand, policy makers are more interested in how strong linkages across bond markets affect the understanding of the global conduct of monetary policy. ...
... Other studies have focused on bond and other financial assets class such as cryptocurrencies, Fintech and green bonds (Gil-Alana, Le, Abakah, & Tiwari, 2021). Interestingly, literature on the dependence between international bond markets across developed and emerging countries has received less attention compared to equity markets comovement (Barassi, Caporale, & Hall, 2001;Barr & Priestley, 2004;Clare et al., 1995;Connolly et al., 2007;Engsted & Tanggaard, 2007;Kirchgässner & Wolters, 1987;Kumar & Okimoto, 2011;Nikkinen, Piljak, & Ä ijö, 2012;Pagano & Von Thadden, 2004;Piljak, 2013;Smith, 2002;Sutton, 2000;Yang, 2005aYang, , 2005b. ...
... For example, earlier studies in this area were based on various linear models. Cointegration analysis has been used as the canonical measure of the linkages between bond markets even though these cointegration analyses do not examine the linkages in the underlying factors that affect bond yields (Clare et al., 1995;DeGennaro et al., 1994;Hafer, Kutan, & Zhou, 1997). Barr and Priestley (2004) using an international capital asset pricing model (CAPM), discovered that bond returns are predictable in different countries over time. ...
Article
Full-text available
The finance literature provides substantial evidence on the dependence between international bond markets across developed and emerging countries. Early works in this area were based on linear models and multivariate GARCH models. However, based on the limitations of these models this paper re-examines the non-linearity, multivariate and tail dependence structure between government bond markets of the US, UK, Japan, Germany, Canada, France, Italy, Australia and the Eurozone, from January 1970 to February 2019 using ARMA-GARCH based pair- copula models. We find that the bond markets in our sample tend to have both upper tail dependence in terms of positive shocks and lower tail dependence in terms of negative shocks. The estimated C-vine shows Eurozone has the highest average dependency. The D-vine, with optimal chain dependency structure shows the best order of connectedness to be the UK, the USA, Italy, Japan, Eurozone, France, Canada, Germany and Australia. The R-vine copula results underline the complex dynamics of bond market relations existing between the selected economies. The estimated R-vine shows Eurozone, Germany and Australia are the most inter-connected nodes. The multivariate distribution structure (interdependency) of bond markets for all countries were modelled with the C-vine, D-vine and R-vine copulas. In this application, the R-vine copula allows for detailed modelling of all bond markets and hence provides a more accurate goodness of fit and mean square error for the interdependency between all markets. In light of the changing volatility in bond markets, we conduct additional tests using time-varying copulas and find that the dependence structure among the bond markets examined is time-varying with the dynamic dependence parameter plots revealing that the nature of the dependence structure is intense during crisis periods.
... Therefore, even though there is far more literature on emerging than on developed economies, in both cases, it is well established that bond markets in different countries tend to move together, i.e. bond prices and returns are positively correlated across countries. Some of the early attempts to investigate this issue are Clare et al. (1995) who provided insight into the significance of international bond market linkages for bond portfolio diversification, and Ilmanen (1995), whose evidence suggested that excess returns of long international bonds were highly correlated implying, in turn, international bond market integration. More recently, Hunter and Simon (2005), using a bivariate conditional correlation GARCH model, examine the lead-lag and 1 In the context of developed countries, Favero and Giavazzi (2002) study the presence of non-linearities in the propagation of financial shocks (devaluation expectations) among the countries that were member of the Exchange Rate Mechanism of the EMS. ...
... For EMU countries, the US volatility spillover effects are rather weak (in economic terms) whereas the European volatility-spillover effects are strong. Earlier studies used co-integration analysis to document the co-movement of international bonds markets (see De Gennaro et al. (1994), Clare at al. (1995), Barassi et al. (2001), Smith (2002) or Driessen et al. (2003)). These co-integration analyses do not, however, examine co-movement in the underlying factors determining bond yields. ...
... In particular, table 9 displays the results of the panel estimation for the four periods. The most important conclusion that can be drawn from these results is that non-EMU countries present a greater vulnerability to world risk factors than EMU-countries 13 . In particular, the coefficient of the international risk factor is always positively significant at the 5% confidence level except for the ...
Conference Paper
Full-text available
The market capitalization of international bond markets is larger than that of international equity markets. Moreover, the extent of international bond market linkages is worthy of investigation, as it may carry important implications for the cost of financing fiscal deficit, monetary policymaking independence, modeling and forecasting long-term interest rates, and bond portfolio diversification. However, compared to a are large body of literature on international equity market linkages (see Bessler and Yang, 2003), only a few empirical works have measured bond systematic risk and investigated international bond market linkages (see Smith (2002) or Barr and Priestley (2004) among them) and they are mainly centered on emerging markets. Recently, some authors have focused their attention in the European context. In our opinion, this recent literature overestimates the impact of systemic risk in yield differential behavior in the EMU (see Dune, Moore and Portes (2002); Favero, Pagano and Von Thadden (2005); Geyer, Kossmeier and Pischer (2004) or Pagano and Von Thadden (2004), among others). Certainly, yield evolution depends on both world and local risk factors, i.e. systemic and idiosyncratic risk. However, when differentials between yields are taken, the impact of world or common risk factors should mostly cancel out. Therefore, the objective of this paper is to implement a similar methodology as in our previous papers (Gmez-Puig, 2006a and Gmez-Puig 2006b) with the aim to be able to carry out both a panel data and a country-specific analysis for EMU and non-EMU participating countries during the first seven years of Monetary Integration with the objective to analyze the relative importance of the two kinds of factors of risk in yield differentials in both groups of countries. As far as we know, this is the first empirical study that implements an analysis of the effects of Monetary Union on the relative importance of systemic and idiosyncratic risk in EU-15 governments’ bonds yield spreads for such a long period of time (seven years since the beginning of EMU). The results present clear evidence that it is domestic (credit risk and market liquidity) rather than international risk factors (US interest rates evolution) that mostly drive the evolution of 10-year yield spread differentials over Germany in all EMU countries during the aforementioned period. Therefore, even though bond returns present a high co-movement (systemic risk accounts for a large proportion of their behavior), a very substantial part of this movement cancels out if we study yield spreads, which mostly reflect idiosyncratic, i.e. specific factors in each different country. In the case of non-EMU countries, where 10-year government yields do not display such high co-movement, adjusted yield spreads (corrected from the foreign exchange factor) are influenced more by world risk factors. The fact that these countries do not share a common Monetary Policy might explain these results.
... Some writers have found low correlations between world bond markets thus enabling effective portfolio diversification opportunities to investors (for e.g. Levy and Lerman (1988), DeGennaro et al. (1994), Clare et al. (1995), Yang (2005), etc.). However, others have reported strong correlations in the very same markets that would limit any portfolio diversification benefits (for e.g. ...
... For instance, Levy and Lerman (1988) find that low correlations among world bond markets make international diversification of bond market portfolios beneficial. Applying a cointegration technique, DeGennaro et al. (1994), Clare et al. (1995) and Yang (2005) also did not find any longrun cointegration relationship among government bond markets of several major industrialized countries, although these papers detect short-run dependencies.. In contrast, Solnik et al (1996) report increasing correlations among several major world bond markets. ...
... The findings of low correlations in the long-term are consistent with the results in literature studying bond portfolios diversification (for e.g. Levy andLerman (1988), DeGennaro et al. (1994), Clare et al. (1995) and Yang (2005)). The finding is also consistent with the time-varying properties of bond correlations in literature which indicates correlations are not consistent across time (for e.g. ...
Conference Paper
The Islamic bonds or sukuk market is one of the fastest growing segments of the nearly US$2trillion global Islamic finance industry. However, lack of trading in secondary sukuk markets is a peculiar feature in this sector and both institutional and retail sukuk investors are known to adopt a held-to-maturity investment strategy. Consequently, there is a critical gap in literature in studying the portfolio diversification opportunities available to sukuk investors and evaluating these in the light of held-to-maturity strategies. This paper (using recently available data and continuous wavelet transform methodologies) has made an initial attempt to study the portfolio diversification strategies for Islamic bond (sukuk) portfolios across heterogeneous investment horizons using the Malaysian and the Gulf Cooperation Council (GCC) sukuk markets as a case study. Our findings critically indicate that returns between local currency sukuk in different markets have low levels of long-term correlations, thus enabling portfolio diversification benefits. However, international currency sukuk issued in different markets exhibit high levels of long-term correlations which impede portfolio diversification benefits for held-to-maturity investments. A similar impediment is also witnessed in the domestic market context where diversification is intended by investing in different types of domestic sukuk. Overall, our findings critically highlight the feasibility of held-to-maturity sukuk investment strategies from a portfolio diversification perspective.
... Even though the researchers have thoroughly evaluated the diversification benefits of stock and bonds, e.g., [4][5][6][7][8], the reported literature on bond markets is highly diverse in terms of its findings. Some studies demonstrated a low correlation between global bond markets, suggesting that diversification benefits investors [9][10][11]. ...
... In most analyses, the long-term investment bands tended to be highly correlated, which signified lower diversification opportunities. Nevertheless, in short-term bands (4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16), most comparisons indicated the presence of low correlation among indices, leading to diversification opportunities. Our findings are somewhat supported by [55][56][57], which also showed the S . ...
Article
Full-text available
Understanding the co-movement and lag-lead relations among indices is an integral part of fi-nancial decision-making. It shows the reactiveness of the market towards the new information. It helps to minimize risk and facilitates optimal portfolio diversification. By employing the wavelet coherence econometric model, this study has analyzed the intricate relations among the bond and Ṣukūk indices using global data belonging to the United States (US), the United Kingdom (UK), Middle East, and North Africa (MENA), and Gulf Cooperation Council (GCC) countries. The findings indicate the presence of strong but similar implications of the initial shock of covid-19 deaths on both Islamic and the conventional markets’ volatilities, especially in long-term in-vestment bands (64-128 days). This opposed the general beliefs about Islamic finance is more sustainable and less volatile to the crises than its traditional counterparts. Moreover, the study reports diverse relationships among Bond and Ṣukūk indices throughout sample periods. In short-term investment bands (4-16), we consistently find low correlations, leading to optimal diversification opportunities. Though in the long-term investment bands (128-256), the high correlations were reported, due to the Covid-19, leading to low diversification opportunities for long-term investors.
... In addition, Engsted and Tanggaard (2007) find suggestive evidence that expected inflation has also a major role to play when it comes to bond market integration. In contrast, the results of Clare et al. (1995) suggest that there is low correlation across international bond markets which in turn is beneficial for risk and portfolio diversification strategies. With a clear focus on the Asian bond market integration, Johansson (2008) suggest that correlations across bond returns are time-varying and exhibit pronounced co-movements during high volatility phases. ...
... Furthermore, we find that the dynamic total connectedness measures are time-varying and economic event dependent. This finding is in-line with Clare et al. (1995) since high co-movements of bond returns occur during volatile periods. Finally, our results coincide with those of Johansson (2008) since the market interconnectedness measures are varying over time. ...
Article
This study investigates the transmission mechanism of Asia‐Pacific sovereign bond yields using a monthly data set, which reaches over the period from January 2003 until December 2017. Sovereign bond yields are decomposed into three latent factors – level, curvature and slope – using the dynamic Nelson–Siegel procedure proposed by Diebold and Li, Journal of Econometrics, 2006, 130(2), 337–364. The yield curve propagation mechanism is examined using the dynamic connectedness framework of Diebold and Yılmaz, Journal of Econometrics, 2012, 182(1), 119–134 and Diebold and Yılmaz, Journal of Econometrics, 2014, 182(1), 119–134 which is based on a time‐varying parameter vector auto‐regression (TVP‐VAR). The results suggest that the net transmitters of shocks are Australia, Hong Kong, Korea and Singapore whereas China, India, Indonesia, Japan and Malaysia have been net receivers of shocks. Across factors, those results are consistent except for the Korean curvature factor. In addition, findings revealed that the highest market interconnectedness can be found in the level factor followed by the slope and the curvature factor. Notably, all dynamic connectedness indices strongly increased during the Global Financial Crisis (2009), which illustrates that the Asia‐Pacific monetary policy is interconnected with each other especially during periods of economic unrest.
... If convergence with the internal (external) benchmark country has occurred, the time-varying coefficient will converge toward zero (one) over time. Mills and Mills (1991); Kasa (1992); Clare, Maras, and Thomas (1995); Serletis and King (1997);Manning (2002); Click and Plummer (2005); Vo (2009) and Calvi (2010) employed the cointegration method. Yields in integrated financial markets cannot diverge arbitrarily from each other; therefore, there must be a stable long-run relationship among yields across countries. ...
... 1974M1 -1990M8 / monthly, 1974Q1 -1990Q3 / quarterly stock markets Clare et al. (1995) USA, Germany, UK, Japan Engle and Granger's cointegration analysis During the 1980s, there were low correlations between bond markets in the long run and hence diversification benefits will have been available over this period. ...
... 3 countries during the early 1980s, the integration of global bond markets has increased intensely over the previous two decades. The degree and the nature of association in the global bond markets have significant implications for bond diversification opportunities (e.g., Clare et al., 1995). To diversify investment risk or enhance portfolio performance, investors eventually seek opportunities in the emerging global bond markets. ...
... There is a vast amount of literature on the portfolio diversification benefits of stock and equity, however, few empirical studies have examined the integration among bond markets (Yang, 2005). In many previous studies, researchers observed low correlations among global bond markets which indicated the scope of portfolio diversification opportunities for investors (Levy and Lerman, 1988;DeGennaro et al., 1994;Clare et al., 1995;Yang, 2005). However, other researchers found strong correlations after experimenting with the same markets and these results hindered portfolio diversification opportunities (Iben and Litterman, 1994;Solnik et al., 1996;Barassi et al., 2001;Smith, 2002). ...
Article
Full-text available
Some investors strive for capital appreciation while others may follow capital preservation strategies in terms of investment. In relation to that, Islamic finance receives a lot of attention from institutional investors and asset managers in the search for higher returns, lower correlation and growth potentiality. Therefore, it would be meaningful to investigate whether sukuk can offer any advantage in terms of global diversification. In such context, we have examined the volatilities and correlations of bond indices of emerging counties such as South Korea, Singapore, China, India, Indonesia, and Malaysia with Thomson Reuters BPA Malaysia Sukuk Index by applying wavelet coherence and Multivariate GARCH analyses. The data covers the period January 2010 to December 2015. We conclude that the sukuk market offers effective portfolio diversification opportunities for fixed income investors of the mentioned sample countries. Global and regional investors can avail the benefits of portfolio diversification through investment in sukuk markets but portfolio diversification is not feasible domestically. As a practical implication to the finance industry, the outcome of this research provides a framework for investigating sukuk market integration of several emerging bond markets which serve as an important platform for conducting further research.
... Evidence on diversification benefits among international bond market linkages has been less of a focus in the empirical financial literature. An early study by Clare [1995], focusing on four major sovereign bond markets (those of the US, UK, Germany and Japan) and using cointegration techniques, found no evidence of bond market integration and concluded that diversification benefits were still possible among those asset classes. A further study by Clare [2000], employing the Vector Autoregression (VAR) methodology, jointly examined the US, UK, and German bond markets and noted significant variations in international bond market relationships and that global factors were most relevant during periods of financial instability. ...
... To illustrate this point, a low correlation coefficient may imply that assets A and B can be included in the portfolio, relative to other assets, and thus portfolio managers with long-time investment horizons may diversify between these assets thinking that they differentiate risk more effectively when in fact these two assets may have time-varying correlations over longer horizons, which may me higher than the simple, static ones. In this case, fund managers may not achieve the diversification benefits initially expected Clare [1995]. For that reason, a more robust statistical analysis is required, which will be undertaken in the next subsection. ...
... Therefore, even though there is far more literature on emerging than on developed economies, it is well established in both cases that bond markets in different countries tend to move together, i.e. bond prices and returns are positively correlated across countries. Some of the early attempts to investigate this issue are Clare et al. (1995) who provided insights into the significance of international bond market linkages for bond portfolio diversification, and Ilmanen (1995), whose evidence suggested that excess returns of long international bonds were highly correlated, implying, in turn, international bond market integration. More recently, using a bivariate conditional correlation GARCH model, Hunter and Simon (2005) examine the lead-lag and contemporaneous relationships between 10-year US government bond returns and 10-year UK, German, and Japanese government bond returns. ...
... volatility spillover effects are rather weak (in economic terms) whereas the European volatility-spillover effects are strong. Earlier studies used co-integration analysis to document the co-movement of international bonds markets (see De Gennaro et al., 1994;Clare et al., 1995;Barassi et al., 2001;Smith, 2002;or Driessen et al., 2003). These co-integration analyses do not, however, examine co-movement in the underlying factors determining bond yields. ...
Article
The market capitalisation of international bond markets is much larger than that of international equity markets. However, compared to the large body of literature on international equity market linkages, there are far fewer empirical studies of bond systemic risk or international bond market co-movements. The extent of international bond market linkages merits investigation, as it may have important implications for the cost of financing fiscal deficit, monetary policymaking independence, modelling and forecasting long-term interest rates, and bond portfolio diversification. In this paper, we investigate the relative influence of systemic and idiosyncratic risk factors on yield spreads over 10-year German government securities during the seven years after the beginning of Monetary Integration. We estimate both panel regressions for the two groups of EU-15 countries (EMU and non-EMU) and specific-country regressions for the nine countries in the EMU group and the three countries in the non-EMU group. All estimations include both domestic (differences in market liquidity and credit risk) and international risk factors. The results present clear evidence that it was mostly idiosyncratic rather than systemic risk factors that drove the evolution of 10-year yield spread differentials over Germany in all EMU countries during the seven years after the beginning of Monetary Integration. Conversely, in the case of non-EMU countries, adjusted yield spreads (corrected from the foreign exchange factor) are influenced more by systemic risk factors. The fact that these countries do not share a common Monetary Policy might explain these results, which may show that government bonds from EMU countries have a better safe-haven status that those of non-EMU countries.
... However, the discrete I(1) and I(0) context of analysis may be too restrictive, since equilibrium errors can be (fractionally) integrated of order d, I(d), where d is allowed to take on non-integer values, i.e., may display long-memory (see, e.g., Dueker and Startz 1998;Leschinski et al. 2018;Basse et al. 2018;Caporale and Gil-Alana 2019). Thus, modeling yield differentials as I(1)/I(0) variables when the true data-generating process exhibits long 1 For results on market convergence and diversification using European countries before the introduction of the common currency see, inter alia Clare et al. (1995), Taylor and Tonks (1989), Favero et al. (1997), Clare and Lekkos (2000), Baum and Barkoulas (2006) and Swanson (2008). 2 Gómez-Puig (2009a, b) find that differentials in the 10-year yield spread between Germany and the other EMU countries was mainly driven by domestic risk factors. Herrera and Pesavento (2005), Cecchetti et al. (2006), Kang et al. (2009) and Halunga et al. (2009). ...
Article
Full-text available
In this paper, we introduce test procedures for no fractional cointegration against possible breaks to a fractional cointegrating relationship in a segment of the data. We base the proposed tests on the supremum of the Hassler and Breitung (Econom Theor 22(6):1091–1111, 2006) test statistic for no cointegration over possible breakpoints in the long-run equilibrium. We show that the new tests correctly standardized converge to the supremum of a Chi-squared distribution and that this convergence is uniform. An in-depth Monte Carlo analysis provides results on the finite sample performance of our tests. We then use the new procedures to investigate whether there was a dissolution of fractional cointegrating relationships between the yields of government bonds of eleven EMU countries (Spain, Italy, Portugal, Ireland, Greece, Belgium, Austria, Finland, the Netherlands, Germany and France) as a consequence of the European debt crisis and to understand the degree of interdependence of lending rates to non-financial corporations across these eleven countries.
... First, we conduct a separate cointegration test (studies of long-term dependency) according to Johansen's methodology (Johansen, 1988), for gasoline and oil prices. The literature recommends various methods for studying cointegration between vectors, starting from the use of the Dickey-Fuller and Engle-Granger tests, through the Cointegrating Regression Durbin Watson (CRDW) test for single equation (see Clare et al., 1995) to the use of Johansen's procedure for multiple equation models (see Johansen, 1988). In our study, we employ Johansen's technique (results are reported in Table 5). ...
Article
Full-text available
The paper focuses on investigating the correlation and volatility of fuel markets in four countries of the Visegrad region, namely Hungary, the Czech Republic, Poland, and Slovakia. The primary objective of the paper is to explore regional fuel markets and retail prices in these countries by employing VAR models and Johansen procedures to analyze the interrelationships between Visegrad fuel markets. Additionally, the paper uses multivariate dynamic conditional GARCH (DCC GARCH-M) models to examine the volatility and covariance of fuel prices in these nations. The results of the study indicate that there are no long-term connections between Visegrad gasoline prices. The performance of the domestic price is independent of other markets. The research also shows long-term relations of diesel prices only among some countries. Overall, the size of these relations is small and mostly statistically insignificant. These findings provide valuable insights into the fuel markets of the Visegrad countries and can be useful in formulating policies related to energy and fuel price regulation. Overall, the study contributes to the literature on fuel markets in the Visegrad region and provides policymakers and stakeholders with essential information necessary for making informed decisions.
... This perception is central to MPT in which negatively correlated assets are required to form a well-diversified portfolio. Mills and Mills (1991) and Clare et al. (1995) are among the pioneer studies to detect opportunity for diversification at the international bond market level. Engsted and Tanggaard (2007) suggested that the news about future inflation was the key factor behind the co-movement between US and Germany bond markets. ...
Article
We investigated the evolution of cointegration in the emerging bond markets with a focus on the transition from BRIC (2007:1-2010:11) to BRICS (2010:12-2020:5) bloc. By applying the Autoregressive Distributed Lag Model (ARDL), we found a long-run cointegration among only 3 of 12 and 2 of 20 possible combinations in the BRIC and BRICS pairings, respectively. However, the observed limited cointegration did not hold in reverse order, thereby casting doubt on the existence of any long-run relationship. As a result, we concluded that the leading emerging bond markets are independent and signal improved diversification opportunities in recent time.
... (1987), which measures diversification based on the price of an asset in the long run. Clare et al (1995) analyzed the cointegration of international bonds in the US, Britain, Germany and Japan, with the Johansen method and the univariate (pair-wise) approach, no cointegration was found between bonds. However, the cointegration test using Johansen test (1991) is more commonly used. ...
Article
The present paper examines the long-run relationship between the Indonesia Stock Exchange (IDX), Malaysia Stock Exchange (Bursa Malaysia) and China Stock Market (SSE). The data used is the daily price index (daily price) of the composite shares (Composite Index) of each country from 2012-2018. The method used is the bivariate and multivariate cointegration approach with testing using the Johansen Test. To strengthen the proof of independence or interdependence of the capital markets of these countries, an Impulse Responses Function and Var Decomposition test will be conducted.
... The lack of co-integration between the international bond markets is evident of the lack of a stable long-run relationship, supporting the lack of bi-directional causal relationships and further supportive of possible diversification (Brook 2008). Numerous studies, such as Gruber (1968), Levy and Sarnat (1970), Mills and Mills (1991), Clare, Maras and Thomas (1995), Ciner (2007) and Rabana (2009), agree with this by explaining that effective diversification is achieved in securities that are not co-integrated with each other. Effective diversification could therefore be achieved through investment into the South African bond market because of the lack of co-integration and the resulting lack of long-run relationships between the international bond markets. ...
Article
Full-text available
Orientation: Globalisation of financial markets has made it progressively more difficult for effective diversification to exist, and as a result portfolio managers are in need of alternative diversification opportunities. Research purpose: Developed financial markets are more likely to be integrated with one another, and better diversification opportunities may be found in emerging markets. Research motivation: Limited research focuses on bond market diversification, and most research does not include South Africa as a diversification destination. This research examines whether developed bond market investors could use South African bonds to diversify their portfolios. Research design, approach and method: This article follows a quantitative research design with a causal-comparative or quasi-experimental approach. The econometric method used was primarily co-integration analysis establishing whether diversification opportunities exist between the South African bond market and five developed bond markets. Main findings: Overall, the findings showed that there was no co-integrating relationship between the South African bond market and developed bond markets, indicating that diversification may be possible in the long term. Furthermore, it was found that the South African bonds were less affected by short-term shocks compared with the developed market bonds. Practical/managerial implications: The results of this study indicated that South African bonds can be used to diversify a developed bond market investors portfolio. Developed bond market traders and fund managers should therefore consider holding South African bonds as a means of reducing their portfolio’s overall risk. Contribution/value-add: Holding South African bonds can be used to preserve a portfolio’s long-term wealth. Additionally, the resistance of South African bonds to short-run shocks also provides investors with a cushion against sudden and unexpected crises.
... Many studies have reported linkages between different assets Le et al., 2020;Gil-Alana et al., 2018;Tiwari, 2013;Ji et al., 2018). Earlier studies in this area have used various linear models and cointegration analysis to examine linkages between financial markets (Clare et al., 1995;DeGennaro et al., 1994;Hafer et al., 1997). Following limitations associated with linear correlation models, multivariate generalised autoregressive conditional heteroscedasticity (GARCH) models were typically used for modelling time-varying market dependence across different assets, and considerable amount of research has been conducted in this area (Barr and Priestley, 2004;Berben and Jansen, 2005;Garcia and Tsafack, 2011;Piljak, 2013;Tsukuda et al., 2017). ...
... Many studies have reported linkages between different assets Le et al., 2020;Gil-Alana et al., 2018;Tiwari, 2013;Ji et al., 2018). Earlier studies in this area have used various linear models and cointegration analysis to examine linkages between financial markets (Clare et al., 1995;DeGennaro et al., 1994;Hafer et al., 1997). Following limitations associated with linear correlation models, multivariate generalised autoregressive conditional heteroscedasticity (GARCH) models were typically used for modelling time-varying market dependence across different assets, and considerable amount of research has been conducted in this area (Barr and Priestley, 2004;Berben and Jansen, 2005;Garcia and Tsafack, 2011;Piljak, 2013;Tsukuda et al., 2017). ...
Article
This paper investigates the dependence structure and dynamics between artificial intelligence (AI) and carbon prices in the era of the 4th industrial revolution. Using the NASDAQ AI price index as a measure of AI and the European Energy Exchange EU emissions trading system (i.e. certificate prices for CO2 emissions) as a measure of carbon prices, we employ time-varying Markov switching copula models from December 2017 to July 2020 that provide evidence of a time-varying Markov tail dependence structure and dynamics between AI and carbon prices. The result shows a negative dependence structure for the return series between AI and carbon prices. However, the relationship is asymmetric, indicating that there is a stronger tail dependence in the lower tails instead of the upper tails. The finding implies that AI is a favourable hedge against carbon prices, therefore indicating the diversification benefits of AI. To understand the issue in detail, we examine the effect of economic policy uncertainty, equity market volatility, and the recent COVID-19 pandemic; we find their negative effect on the dynamic dependence structure between AI and carbon prices at lower and higher quantiles. This evidence offers additional support for the safe-haven ability of AI for carbon prices.
... Nonetheless, Clare et al. (1995), DeGennaro et al. (1994), and Yang (2005) detected no evidence of co-integration between global bond markets in the short run. ...
Article
Understanding the co-movement among asset returns is a critical issue in finance, as investors can minimize risk through diversification. International investors seek alternative asset classes to diversify their portfolio. Therefore, it would be meaningful to investigate whether sukuk (Islamic bond) offer any advantages in terms of global diversification. In this context, we examined the volatilities and correlations of sovereign bond indexes in developed countries, such as the US, Canada, Germany, the UK, Australia, and Japan, and the Thomson Reuters BPA Malaysia Sukuk Index, using wavelet coherence and multivariate-GARCH analyses. The data cover the period January 2010 to December 2015. The results of the study significantly highlight that wavelet coherence illustrates lower co-movement between returns on developed market bond index (the US, the UK, Australia, Canada, Germany, and Japan) with returns on the Malaysian sukuk index during the sample period. Moreover, the Malaysian sukuk market has negative unconditional correlation with the US and Canadian bond markets, which is a good sign of diversification benefits. This study reveals attractive opportunities in terms of diversification benefits, with credit quality and sharia-compliant financial sector exposure for investors who want to invest in fixed-income securities.
... Moreover, Ciner (2007) examined the cointegration between international sovereign bond markets and found no evidence of dynamic links between the indices during the sample period; however, another recent study revealed that Asian bond markets were highly cointegrated in the longterm and that these relationships were highly significant during the sample period (Johansson, 2008). The findings of this study also support the results of studies conducted by DeGennaro et al. (1994) and Clare et al. (1995), though the current findings contradict other recent study findings, such as those by Smith (2002) and Barassi et al. (2001). There are many implications of the analysis in this section. ...
Article
Full-text available
Purpose Market links (and price discovery) between financial assets and lead–lag relationships are topics of interest for financial economists, financial managers and analysts. The lead–lag relationship analysis should consider both short and long-term investors. From a portfolio diversification perspective, the first type of investor is generally more interested in determining the co-movement of financial assets at higher frequencies, which are short-run fluctuations, while the latter concentrates on the relationship at lower frequencies, or long-run fluctuations. The paper aims to discuss these issues. Design/methodology/approach For this study, a technique was employed known as the wavelet approach, which has recently been imported to finance from engineering sciences to study the co-movement dynamics between global sukuk and bond markets. Data cover the period from January 2010 to December 2015. Findings The results indicate that: there is no unidirectional causality from developed market bond indices to Malaysia and Dow Jones indices, which is promising for fixed-income investors of a developed market; and in relation to emerging markets, the Malaysian sukuk market has a bidirectional causality with Indonesia, Malaysia, India and South Korea bond indices but not China bond indices, while in terms of the Dow Jones sukuk index, there is no unidirectional causality between the listed emerging markets and the sukuk index except Indonesia’s market during the sample period. Research limitations/implications This analysis provides evidence regarding the timely and appropriate measure of correlation changes and the behaviour of sukuk and bond indices globally, which is beneficial to the management of sukuk and bond portfolios. Originality/value The evidence hitherto unexplored, which was produced by the application of a wavelet cross-correlation amongst the selected sukuk and bond indices, provides robust and useful information for international financial analysts as well as long and short-term investors.
... The findings of high correlations in the long-term are inconsistent with the results in literature studying bond portfolios diversification (for e.g. Levy andLerman (1988), DeGennaro et al. (1994), Clare et al. (1995) and Yang (2005)). ...
Article
Full-text available
Sukuk is a highly appealing alternative instrument of conventional bond in the financial market over the last two decades. To a certain extent, the market players assume sukuk as the same as bond. However, sukuk has its own fundamental asset backed principles, whereas bond is backed by debt. The objective of the study is to examine the Granger-causality and lead–lag relationship between sukuk and bond by using the data of the Malaysian Government securities return for both conventional and Islamic instruments. The data for every working day of 7 years covering the period from January 31, 2007 to December 31, 2013 were collected from Bloomberg database. The yield returns of both securities have been plotted for each six months of a year. This study applied both Granger-causality and dynamic co-movement techniques such as, continuous wavelet transforms (CWT) coherence for analyzing the temporal evolution of the frequency content of both securities by decomposing each period into different time scales. The empirical findings of the paper reveal that with a bit of exception, there is a causal relationship between sukuk securities and conventional bonds for a given period of time. For robustness, this study applied the wavelet coherence approach and found that bond is led by sukuk in the long term investment horizon rather than in the short term. Our findings relating to the lead-lag relationship between sukuk and bonds have important implications in terms of policy regulations and investment management. Future research and market practices could reinvestigate the differences between these two securities across different markets and types.
... The findings of high correlations in the long-term are inconsistent with the results in literature studying bond portfolios diversification (for e.g. Levy andLerman (1988), DeGennaro et al. (1994), Clare et al. (1995) and Yang (2005)). ...
Article
Sukuk is a highly appealing alternative instrument of conventional bond in the financial market over the last two decades. To a certain extent, the market players assume sukuk as the same as bond. However, sukuk has its own fundamental asset backed principles, whereas bond is backed by debt. The objective of the study is to examine the Granger-causality and lead–lag relationship between sukuk and bond by using the data of the Malaysian Government securities return for both conventional and Islamic instruments. The data for every working day of 7 years covering the period from January 31, 2007 to December 31, 2013 were collected from Bloomberg database. The yield returns of both securities have been plotted for each six months of a year. This study applied both Granger-causality and dynamic co-movement techniques such as, continuous wavelet transforms (CWT) coherence for analyzing the temporal evolution of the frequency content of both securities by decomposing each period into different time scales. The empirical findings of the paper reveal that with a bit of exception, there is a causal relationship between sukuk securities and conventional bonds for a given period of time. For robustness, this study applied the wavelet coherence approach and found that bond is led by sukuk in the long term investment horizon rather than in the short term. Our findings relating to the lead-lag relationship between sukuk and bonds have important implications in terms of policy regulations and investment management. Future research and market practices could reinvestigate the differences between these two securities across different markets and types.
... Findings showed that there was no evidence of the cointegration among the interest rates. Clare et al. (1995) examined the correlation among the four bond markets (Germany, Japan, UK and US). Findings show that there was a weak correlation between the bond markets. ...
Article
Full-text available
Financial markets are growing and getting more integrated. Therefore, the transmission of bond markets across countries has become an important issue for monetary policymaking and portfolio diversification. This study examines interactions among government bond markets of 3 developed (Japan, US, Germany) and 5 emerging countries (Russia, India, China, Brazil and Turkey) that cover the period of January 2006 to September 2015. A VAR analysis is carried out to monthly data in order to determine the linkages among the 10 year government bond yields. The results showed that the impact of US bond market is not dominant while the Japanese market is more influential. Furthermore, Japanese and Chinese bond markets are found less integrated.
... However, once the 2008 financial crisis hit, this story of yield convergence takes a turn for the worse. Clare, Maras, and Thomas (1995) present a study on the integration of the bond markets of the United Kingdom, the United States, Germany, and Japan from 1978 to 1990. Using the familiar Engle and Granger methodology, the authors find low correlations between the mentioned bond markets in the long run compared to stock market returns. ...
Article
Full-text available
The integration of financial markets has been a recurring theme in academic and financial research. The majority of the literature has focused on equity markets. Literature on the integration of international bond markets is not as common, specifically regarding that of European bonds since the beginning of the common currency area in 1999.This paper estimates a fixed effects pooled model and then proceeds to undertake panel unit root and cointegration tests to determine the degree of co-movement of European sovereign bond yields. The reported estimates suggest that yields move together over time, thus the benefits of diversification in European government bond portfolios may be limited. The results also have important implications for monetary policy. Given that economic shocks (e.g. inflationary shocks) are transmitted quickly from country to country, then it will complicate the task of monetary policy when it comes to pursuing an independent policy with respect to domestic monetary conditions in the presence of asymmetric economic shocks.
... The studies are: Karfakis and Moshos (1990),Kasa (1992), Smith, Brocato and Rogers (1993), Corhay, Tourani and Urbain (1993),Clare, Maras and Thomas (1995) andMasih (1997). ...
Article
Full-text available
The purpose of this paper is to examine the integration of selected Central and Eastern European equity markets for the period of January 2nd, 2005 to December 30th 2008. The cointegration tests according the Johansen methodology suggest: (1) existence of multilateral integration between selected SEE equity markets, and (2) existence of multilateral integration between the group of selected SEE equity markets and the leading European equity index (FTSE). Error Correction Model is developed to deals with the long-run equilibrium relationships, while providing the possibility of short run divergence. The model allows finding the lead-lag relationships between market indices, or how the turning points in one series precede turning points in the other. These findings have important applications for investors. Integration of the markets implies that there are fewer opportunities to diversify portfolios within the examined markets. The investors should focus more on diversifying across sectors or across regions.
... So in order to determine potential success of this strategy, stochastic properties, specifically integration and co integration, of variables have to be investigated. Clare et al. (1995) employ ADF test to identify integration properties of five countries bond market data from January 1978 to April 1990 and find that all series are non-stationary. Then they use Engle and Granger (1987) methodology to examine long-run relationships between four major international government bond markets; US, UK, Germany and Japan and conclude that bond indices are not highly correlated. ...
Article
Full-text available
Stochastic properties are the basic determinants of behavior of economic variables. These properties are also important for construction of econometric models, interpretation of the findings and forecasting. So prior to any econometric study time series properties of variables have to be analyzed. Stochastic properties are also decisive for validity of many economic theories, including Fisher Hypothesis, Purchasing Power Parity, Consumption Based Asset Pricing Model, several monetary models and co-integration of international bond markets; those represent long run relationships between variables. This paper aims to put forward the importance of stochastic properties of economic variables for basic macroeconomic theories by giving special emphasis to real interest rates.
... Other researchers have found non-consensus evidence on the existence of long-run cointegration relationships among government bond markets in major industrial countries. (Barassi et al., 2001;Clare et al, 1995;DeGennaro et al., 1994;Smith 2002) Applying the data-determined forecast error variance decomposition methodology, Yang (2005) showed that international bond markets are not completely segmented but instead are partially segmented and there is no distinctive leadership role by any particular national bond market during 1986-2000. empirical evidence that the Japanese bond market is independent of other major national bond markets, but it exerts some influence in determining bond yields in the other major bond markets. ...
Article
This paper examines the dynamic patterns of international linkages of the Japanese government bond yields with government bond yields in the US, the UK and Germany during the period from January 1980 to December 2004. Applying the vector autoregression (VAR) model and the vector error correction (VEC) model to monthly observations of nominal bond yields and exchange rate-adjusted bond yields over the 25-year period, this paper provides consistent empirical evidence that the Japanese bond market is independent of other major national bond markets, but it exerts some influence in determining bond yields in bond markets in other major industrial countries. However, since the early 1990, evidence shows that the independence of the Japanese bond market has increased further, while its leading role in global bond markets has been eroded significantly.
... 992, Hall et. Al., 1992) • Any pair of series with a mean-reverting spread: For example two different equity indices (or bond indices) or pairs of bond and equity indices in the same country can be cointegrated, but they are not always so. It depends on the time series properties of the spread (see Alexander, 1995, Alexander and Thillainathan, 1996, Clare et. al., 1995 • Related commodities: Carry costs represent the difference in prices between related commodities. If carry costs are mean-reverting, then commodities based on the same underlying market will be cointegrated (see Brenner and Kroner, 1995.) • Equities within an index: since the index is by definition a weighted sum of the constituents, t ...
... 6. ECMs of very short rates sometimes reveal surprising results about the directions of causal flows between different maturities, and it is not always the very short rates that lead the system. There is some evidence of cointegration in international bond markets and in international equity markets, but arbitrage possibilities seem quite limited (Clare et. al. 1995, Corhay et.al. 1993, Karfakis and Moschos 1990, Kasa 1992, Smith et.al. 1993). However in recent years the US market does appear to be somewhat of a leader in international equity and bond markets (Alexander, 1995, Masih, 1997). Cherchi ...
Article
Full-text available
Although models of cointegrated financial time series are now relatively common place in the literature their importance has, until very recently, been mainly theoretical. This is because the traditional starting point for portfolio risk management in practice is a correlation analysis of returns, whereas cointegration is based on the raw price, rate or yield data. In standard risk-return models these price data are differenced before the analysis is even begun, and differencing removes a-priori any long-term trends in the data. Of course these trends are implicit in the returns data, but any decision based on long-term common trends in the price data is excluded in standard risk-return modelling. Cointegration and correlation are related, but different concepts. High correlation of returns does not necessarily imply high cointegration in prices. An example is given in figure 1, with a 10-year daily series on US dollar spot exchange rates of the German Mark (DEM) and the Dutch Guilder (NLG) from 1975 to 1985. Their returns are very highly correlated: the correlation coefficient is approximately 0.98 (figure 1(a)). So also do the rates move together over long periods of time, and they appear to be cointegrated (figure 1(b)). Now suppose that we add a very small daily incremental return of, say, 0.0002 to NLG. The
... outputs of the two analyses differ: principal components gives two or three series which can be used to approximate a much larger set of series (such as the yield curve); cointegration gives all possible stationary linear combinations of a set of random walks. See Gouriereux et. al. (1991) Kasa (1992), Smith et.al. (1993), Corhay et.al. (1993 and Clare et. al. (1995)). However in recent years the US market does appear to be somewhat of a leader in international equity and bond markets and there now seems to be more cointegration between international equity markets than between international bond markets (Alexander, (1994) and Masih (1997)). ...
Article
Full-text available
The main objective of a hedge strategy is to generate positive returns irrespective of market conditions. This paper presents a classic hedge fund strategy: an investment vehicle whose key objective is to minimize investment risk in an attempt to deliver profits under all market circumstances. The hedge is designed to have minimal correlation with the market and, irrespective of market direction, the fund seeks to generate positive alpha. A significant difference between this model and more traditional hedge fund strategies is that portfolio optimization is based upon the cointegration of prices rather than the correlation of returns. Models that are based on mean-variance analysis seek portfolio weights to minimise the variance of the portfolio for a given level of return. The portfolio variance is measured using a covariance matrix and these matrices are notoriously difficult to estimate. Moreover the mean-variance criterion has nothing to ensure that trac king errors are stationary. Although the portfolios will be efficient, the tracking errors will in all probability be random walks. Therefore the replicating portfolio can drift very far from the benchmark unless it is frequently re-balanced. This paper shows that it is possible to devise allocations that have stationary tracking errors: any strategy that guarantees a stationary tracking error must be based on cointegration. Efficient long short hedge strategies may be achieved with relatively few stocks and with much lower turnover rates compared to traditional market neutral strategies.
... So in order to determine potential success of this strategy, stochastic properties, specifically integration and co integration, of variables have to be investigated. Clare et al. (1995) employ ADF test to identify integration properties of five countries bond market data from January 1978 to April 1990 and find that all series are non-stationary. Then they use Engle and Granger (1987) methodology to examine long-run relationships between four major international government bond markets; US, UK, Germany and Japan and conclude that bond indices are not highly correlated. ...
... Edwards (1998) found linkage between Mexican and Argentine bond markets after the 1994 Peso crisis. Other work on corporate bond markets include: Clare et al. (1995), Smith (2002), Santos and Tsatsaronis (2003) and Yang (2005). Also, recent work by Remolona et al. (2007Remolona et al. ( , 2008 and Kim et al. (2006) modeled sovereign credit risk. ...
Article
Full-text available
Purpose The purpose of this paper is to model the components of credit risk in primary debt markets and evaluate changes in these factors in times of crisis. Design/methodology/approach The authors use a unique dataset consisting of nearly 163,000 new loans and bond issues in the USA and internationally during the period January 1992 through December 2005. Findings The authors find that credit spreads are related to market liquidity, best represented by total proceeds, ratings and the interaction between maturity and rating. The authors control for various crisis periods, including regional financial crises and find that spreads generally increased in response to the Asian Crisis with the international markets exhibiting the larger increases. There is mixed evidence of asymmetric effects of shocks. In the US loan markets, the adjustment factor reduces forecast variance (Θ1<0). In contrast, the adjustment factor is not significant for US bonds, possibly indicating a more rapid adjustment and greater efficiency in this market. The opposite effect is seen in the international loan and bond markets with Θ1>0, indicating a persistent increase in spread volatility. Originality/value The paper extends our understanding of the components of primary credit spreads and the interactions between primary debt markets during crisis periods.
... Shamsuddin and Kim (2000, 2003) examine cross-country stock market relationships by employing the cointegration technique of Johansen (1988). Chen (1995) and Clare, Maras and Thomas (1995) use pairwise cointegration in studying the performances of a group of countries. ...
Article
This paper recognizes that intuitively a clear understanding about security market pricing procedures from both long-and short-runs viewpoints are important to an astute investor. Here an attempt is made to identify the efficient method of empirical studies in asset pricing that are relevant under the integrated global market system. Accordingly, it has briefly reviewed recent studies in asset pricing that are particularly important from a security market standpoint under the prevailing global economic and financial market system. Through this survey using the cointegration approach one can efficiently analyze the long-run relationship between a priori variables that are considered as a proxy for systematic risk factors and security market prices from the perspective of any nation within the globe. Field of Research: Asset pricing, stock market analysis, systematic risk factors, cointegration.
... Much of the research on the benefits of global diversification has focused on equity markets, however, and relatively less has been done on global sovereign bond markets. An early study on the international bond market linkages by Clare et al. [1995] focused on four major sovereign bond markets (those of the U.S., U.K., Germany, and Japan) for the [1978][1979][1980][1981][1982][1983][1984][1985][1986][1987][1988][1989][1990] period. Using cointegration techniques the authors found no evidence of bond market integration and concluded that diversification benefits were still possible among those asset classes. ...
Article
Full-text available
This paper examines the extent of linkages among Euro and non-Euro government bond markets in the pre-and post-Euro introduction period. Multivariate cointegration analyses indicate absence of cointegration among the Euro bond markets in the pre-Euro period but a weak one in the post-Euro period. By contrast, there is evidence of strong cointegration in the post-Euro period among the non-Euro bond markets. Further, in the post-Euro period several bivariate linkages among the Euro bond markets exist. Finally, the US bond market appears to uni-directionally Granger-cause all Euro bond markets in both subperiods. The findings have important implications for investors, in terms of diversification benefits, and for policymakers, in terms of the proper conduct of the common monetary policy.
Chapter
The study evaluated the interlinkages and diversification opportunities in the context of emerging bond markets from 2007:1 to 2020:5, using the vector autoregressive (VAR) model and sub‐period analyses to compare BRIC (2007:1–2010:11) and BRICS (2010:12–2020:5) regimes. As indicated by the breaking unit‐root test, dummies for the global financial crisis and COVID‐19 were incorporated in the analyses. VAR results showed that the Indian bond market responds positively to the previous change in the Chinese bond market during the BRIC era while BRICS bond markets are mostly uninfluenced by prior behavior patterns of one another. These suggested that the diversification opportunity has been increased following the admission of South Africa to the league. In addition, variance decomposition and impulse response provide proofs to suggest that BRICS bond markets are more exogenous and independent compared to what is obtained during the BRIC period. Consequently, the authors concluded that the BRICS bloc has provided greater diversification opportunities for emerging markets’ bondholders in the recent past.
Article
Full-text available
Financial market liquidity is an important yardstick of value for investors and central monetary authorities. Secondary market liquidity itself cannot be observed directly and is instead measured using a number of different proxies. The most common proxy is the asset bid-off price spread. In this study we conduct time series analysis of the bid-offer spread in order to ascertain if the level of liquidity in a specified market has improved over a period of time. The market we select is the United Kingdom government bond market or gilt market. During the 1990s the UK monetary authorities introduced a number of structural reforms in the gilt markt, designed to improve secondary market liquidity. We measure the success of the reforms by attempting to determine if liquidity levels improved in the post-reform period, via the examination of the bid-offer spread. We examine the determinants of this proxy measure, and estimate which of the explanatory variables carries the greatest weight in influencing liquidity levels. We conclude that a number of the independent variables that we examined, including bond issue size and maturity, are found to be significant determinants of liquidity. We conclude further that similar structural reforms should be considered by other central monetary authorities wishing to improve bond market liquidity levels, and that the determinant factors we cite should be reviewed during periods of market correction, when liquidity levels decrease.
Book
Cambridge Core - Econometrics and Mathematical Methods - Introductory Econometrics for Finance - by Chris Brooks
Book
This title was first published in 2000: An investigation of the issue of financial markets interdependence or integration through the application of recently developed and powerful techniques in time series econometrics. The text provides coverage of theoretical analysis and applications in the context of the Asia-Pacific region.
Article
The purpose of the present study is to explicitly model the correlation dynamics of Eurozone sovereign debt markets. Our analysis runs from 2000 through 2014. Time varying correlations are derived from a dynamic conditional correlation GARCH model (t-cDCC model). We document substantial variability in correlations that is time and region-dependent. Evidence suggests that the Lehman collapse coupled with the German banks’ bailout programme and the events that followed have undermined sovereign debt integration. Moreover, sensitivity analysis provides useful insights that global and regional risk factors play pivotal role in explaining correlation structure both before and after the onset of the Eurozone sovereign debt crisis. We believe that our results entail important implications for market authorities, international fixed income portfolio diversification and asset allocation.
Article
We examine the value of Eastern European emerging bond markets to global fixed income managers. In an environment where bonds from traditional developed markets are offering modest yields, emerging market bonds with attractive yields are becoming more popular with institutional managers. Furthermore, the returns on these bonds exhibit low correlations with traditional fixed income investments, and thus offer opportunities for portfolio diversification. We develop a multifactor forecasting model and estimate its parameters using a dynamic Kalman Filter procedure. The forecasts are then used to construct optimal mean-variance portfolios with and without emerging market bonds. We find that the portfolios which include emerging market bonds have significantly higher Sharpe ratios.
Article
The authors examine the dynamic correlations and implications of various financial asset classes, such as equities, bonds, ETFs, commodities, and real estate, in the United States from 1990 to 2013 and find that the correlations have varied across time. They detect no evidence of contagion but rather of herding behavior among these assets. The variation was more pronounced during market declines, but differed in extent across economic expansions and contractions. Finally, shocks from one asset class to another were not persistent, meaning that the assets were able to absorb the shocks and quickly return to normalcy. The implications for portfolio decisions are clear: Even well-diversified portfolios must be updated to reflect changing economic and financial environments, and past asset behavior does not imply similar future behavior.
Article
Full-text available
There is a critical gap in literature in studying the portfolio diversification opportunities available to sukuk investors and evaluating these in the light of held-to-maturity strategies usually adopted by these investors. This paper has made an initial attempt to study the portfolio diversification strategies for sukuk portfolios across heterogeneous investment horizons. Our findings critically indicate that returns between local currency sukuk in different markets generally have low levels of correlations across different investor holding periods, thus enabling both short and long-run portfolio diversification benefits. However, in contrast, international currency sukuk issued in different markets exhibit high levels of correlations in the longer-term investor holding periods. Also in the domestic market context, returns on different classes of domestic sukuk are found to exhibit strong correlations in the longer-holding periods. Our findings critically highlight the feasibility of held-to-maturity sukuk investment strategies from a portfolio diversification perspective.
Article
This paper extends research concerned with the evaluation of co-movement and correlations in international fixed income markets by examining dynamic linkages in three emerging bond market yields along with the US. The empirical results suggest that daily bond yields for these markets are not linked, which implies significant long-run risk diversification. In addition, dynamic correlations between emerging market bond yields appear to be more sensitive to negative news rather than to positive news, albeit at low magnitudes. Furthermore, accounting for time-variation is mostly beneficial and leads in most cases to an improvement in the risk-reward ratio relative to measures which do not consider time-variation.
Article
The paper investigates empirically and from a dynamic perspective the causality relationships between the different EMU's government bond markets. We focus on two main periods: the pre-crisis period (from November 2003 to September 2008). and the crisis period (from September 2008 to February 2013), Using a multivariate Granger causality approach, we find that the integration of government bond markets is "week, and the number and the direction of causality change during the crisis. Furthermore, countries exhibit different paths of financial convergence with Germany that we consider to be virtually free of risk, especially during the crisis period, These findings have implications for investors in terms of the diversification of their portfolios, and for policymakers in terms of managing common monetary policy.
Book
This research dissertation provides theoretical considerations and empirical evidence that Pension Insurance Funds (Pensionskassen) in Germany should consider SRIs and alternative investments as part of their strategic asset allocation. Furthermore, derivative overlay structures appear suitable to tailor-made the risk management of pension investment portfolios without impacting average performance. Using Vector Error Correction models, combined with bootstrap simulation techniques, we are able to generate future portfolio return distributions that allow us to simulate different investment strategies.
Article
This paper models the cross-market dynamics in an emerging market regional setting using a homogenous set of international sovereign bonds issued by key Latin American economies. We employ Johansen's and a modified three-step procedure, which generates portfolio adjustment weights while accounting for common volatility effects across markets. The bonds are grouped based upon maturities across different markets in the Latin American region. This paper provides insights into the nature of sovereign linkages of key Latin American markets generally, and sovereign international bonds with varying maturities more specifically. The empirical results also highlight the manner in which sovereign linkages evolve in Latin America and the required portfolio adjustments following a credit event in the region.
Article
The aim of this study is to analyze the impact that the monetary union has had on risk diversification opportunities in European public debt markets. We examine the common trends in the evolution of daily 10-year yields in EU-15 countries during 1994–2008. Despite finding evidence in favor of multiple cointegration, the results support the existence of more than one trend between long-term EU-15 sovereign yields. Furthermore, when we focus our analysis on the euro zone, although interdependency increases, we can still reject the existence of a single common trend. These results have important implications for investors in terms of their risk diversification possibilities in a single currency context.
Article
This thesis provides an econometric analysis of the bulk shipping markets and the implications for shipping investment and financial decision making. Chapter 1 sets the scene by providing a historic analysis of bulk shipping markets over the last 55 years. From this analysis, four shipping markets (freight, newbuilding, second-hand and demolition) are distinguished as well as a fifth one (ship finance) that acts as a facilitator to the other four. Also, with the help of correlation analysis, the factors influencing these markets are identified. The chapter then considers five critical interdependent forces (economic structure, ship supply and demand capital flows expressed by investor preferences and investment performance) that comprise the shipping market and move in cyclical patterns. This way, the chapter explains the role of the shipping cycle in devising investment strategies. Based on this analysis, Chapter 1 ends by defining the thesis aim and objectives. Chapter 2 presents the thesis methodology. It critically analyses the methods used in the collection of data and the interpretation of it, as well as the problems experienced while collecting it. The four subsequent chapters present the results from the analysis of the four shipping markets (freight, newbuilding, second-hand and demolition). Based on theory, Error Correction Models describing and quantifying the relationships between the variables are developed for all four markets. This way the thesis fills a gap in maritime economics literature by estimating models where none of the CLRM assumptions are violated. Consequently, statistical inferences from these models can be made safely. Furthermore, by disaggregating into the different ship types according to size, the thesis finds that different variables have different effects on each type, thus proving that each ship type has its own distinctive characteristics. Finally, chapters 4 to 7 compare different econometric methods, the theoretical Error Correction and the atheoretical family of Auto Regressive Moving Average (ARMA) models. It is found that theoretical models, are still to be preferred if one wants to achieve the classical objectives of Econometric Business Cycle Research simultaneously (to describe and forecast cycles and to evaluate policies and test economic theories). However, if not all goals have to be met with a single vehicle, other methods might serve the purpose equally well or even better as is the case with the Auto Regressive Moving Average method whose forecasts outperform those of the ECM method on many occasions. With respect to the period or time charter market, the thesis finds that spot rates are the major determinant for period ones. This indicates the validity of the pure expectation hypothesis of the term structure relationship between spot and period rates. However, this hypothesis is not always valid since on two occasions (Panamax bulk carriers and Aframax tankers), fleet changes, a variable incorporated in the model to depict market changes and risks, is found to be statistically significant. This leads to inconclusive evidence regarding the validity of the pure expectation hypothesis of the term structure relationship and needs further investigation. Finally, it is found that the forecasting ability of the models for the timecharter market is superior to that for the freight market. This can be attributed to the dominance of the stochastic component of the spot rates over the deterministic one, which makes their accurate forecasting a very difficult task. As far as the econometric analysis of new vessel prices is concerned, shipbuilding costs are found to have the most significant effect on the determination of newbuilding prices for all ship types. Time charter rates have an effect only on few ship segments. This is in line with theory that newbuilding prices are cost driven rather than market driven as second-hand ship prices are. It is also found that actual exchange rates do not affect shipbuilding prices but cost variations due to exchange rate fluctuations do. Orderbook as a percentage of the fleet, used as a proxy for shipyard capacity due to data discrepancies and lack of long enough time series for the later, is found significant only for tankers indicating that shipyards' expansion policy is aimed at high value ships like tankers rather than bulk carriers. Finally, newbuilding prices for some ship types may be driven to a certain extent by asset pricing and speculation. Newbuilding and timecharter rates have the greatest effect of all variables on the determination of second-hand prices, in most cases both in the short and the long run. The cost of capital is only significant for bulk carrier owners. The only exception is the Suezmax segment. Suezmax prices have been closely pegged to VLCCs with a discount but not proportional to the size. In other words Suezmaxes are rarely bargain vessels. Second-hand prices of Suezmaxes could therefore be more closely tied to newbuilding prices than for other tanker sizes. Finally, orderbook as a percentage of the fleet has a negative effect on the prices of second-hand vessels only in the long run and only in large and Panamax tankers. The thesis also finds that demolition prices are primarily driven by market conditions and expectations. In addition, the price of scrap steel is also found to have a significant effect on VLCCs due to increasing demand for scrap steel that makes demolition traders eager to offer higher prices for larger tankers to satisfy demand. Finally, it is found that the volume of scrapped ships has a negative effect on the demolition price of medium and large tankers. This is due to new legislation usually stemming from an accident or environmental campaigns that may force shipowners to scrap their ships earlier than they had originally anticipated. Shipowners invest in different ship markets and vessel sizes in the expectation of achieving a reduction in risk via the resulting diversification in their income. However, it is frequently observed that shipping companies focusing on a particular ship type achieve equally good or even better risk levels than those investing in various ship types and size. A question therefore arises whether such diversification strategies really reduce the investor's risk. This thesis investigates the potential of risk reduction benefits for a bulk shipping investor through diversification. It first analyses the traditional risk reduction approach of calculating the variance and the standard deviation of a portfolio. Results show that risk reduction benefits are achieved through diversification. Then, the thesis builds upon the shortcomings of correlation, namely the fact that while markets may tend to diverge considerably in the short-run, like periods of up to a year, they may actually be integrated over longer periods. If the income, expressed in time charter equivalent rates, of the various ship types or sizes is very strongly correlated in the long run, diversification will be less effective than if the ship markets or segments operated independently of one another. An important indication of the degree to which long run diversification is available to shipping investors is given by determining whether the markets are cointegrated. The thesis employs the Johansen method on 247 different combinations of investment in the dry and wet bulk markets. It finds that investing in more than one type of bulk carrier nullifies any risk reduction benefits. Furthermore, risk reduction benefits decrease as diversification increases with no risk reduction benefits obtained when investment involves more than five different ship types/sizes. These results initially seem to be in contrast with portfolio theory which claims that risk reduction benefits increase with higher diversification. However, the reason behind this difference lies with time horizon and the results actually supplement the theory of risk reduction through diversification by showing that the benefits of diversification in most cases may exist in the short run but disappear in the long run. Finally, finding such long run relationships supports the existence of inefficiencies in the shipping freight market, a finding in line with previous research. This thesis also develops an analytical tool for shipmanagers to measure the possible losses, within a specified time horizon and confidence interval, of their portfolios by calculating Value at Risk with the variance-covariance, historical and Monte Carlo simulation methods. This tool allows managers to identify the extent to which each asset contributes to these possible losses, as well as get an idea of the maximum possible losses should the worst case scenario occur. Based on this framework, shipping firms can then make informed decisions about maintaining or expanding lines of business, or whether to hedge financial risks at the firm level. In our example both VaR and CVaR figures are not high enough for the managers to seek hedging of their positions. The thesis argues that even if managers decide to hedge, it makes more sense to enter some of the ships into period charters, if they can, rather than use freight derivatives due to the high transaction and brokerage costs associated with the latter. However, the purpose of the example is neither to show that shipping is low risk nor disregard the use of freight derivatives as hedging tools but rather to promote VaR and CVaR as essential tools for risk measurement and hedging strategy determination in day-to-day shipping operations. In other words, the thesis argues that shipowners shall first try to determine their level of risk-exposure, then decide whether or not this exposure is acceptable to them and then employ different risk management tools to minimise such exposures. Nevertheless, the thesis argues that VaR-CVaR calculations should only be considered as a first order approximation and users should not be lulled into a state of complacency but rather recognise its limitations. Finally, this thesis introduces Real Option Analysis and exotic options in particular as an alternative to the traditional capital budgeting technique for evaluating a series of shipping projects. The thesis considers the option to expand, timing and defer options, the option to choose the best of two assets and the option to vary the firm's production methods. Compound option are used to value the expansion option through ordering an additional number of ships at a predetermined price, showing that such options may increase the shareholders' value substantially. Also a framework to critically assess asset play opportunities is developed. Furthermore, by evaluating investment opportunities using American Exchange Options, substantial differences are found compared to the NPV method in both the value of the investment opportunities and the timing of when the project is undertaken. Chooser options are employed to evaluate the various options open to a shipowner in order to optimise strategic decision making. Finally, Exchange options are used to value the decision to invest in a new ship type. Overall, Real Options are useful tools
Article
This article uses MSCI bond index data to assess the degree of international bond market integration using modern cointegration techniques. Using daily data over a sample period from January 1994 to August 2006 the analysis shows that bond markets are indeed governed by a common long run relation that is subject to periodic structural change. The existence of such a common trend has important implications for both market efficiency and portfolio diversification arguments in favor of international diversification. The analysis adds to the existing literature by employing regime switching techniques to allow for structural change in the long run equilibrium. By allowing for occasional breaks in the central long run relation the analysis provides compelling evidence in favor of international bond market integration. The article shows that the prepayment-default model has significant explanatory power. Using the mortgage loan prices at origination, the model shows that OAS and duration depend on the FICO scor...
Article
Full-text available
This article investigates the dynamic linkages among four major sovereign bond yields (German, Japanese, U.K., and U.S.) for the 1990–2010 period. Using VAR analysis and Engle’s dynamic conditional correlation GARCH specification, the author examines the short- and long-run linkages between yield pairs and finds that yield correlations are time-varying and differ during economic expansions and contractions. Finally, the author assesses the impact of bond yield correlations on the other bond yields’ dynamic correlations and report that the U.S. bond yield volatility affects the other yields’ correlations differently. The results have significant implications for bond portfolio construction and monetary policymaking.
Article
Full-text available
The importance of maintaining sufficient liquidity in financial markets is emphasised strongly in the academic literature. During the 1990s the United Kingdom monetary authorities introduced a number of structural reforms in the government bond market, aimed at improving secondary market liquidity. In this paper we examine the impact of the reforms by attempting to ascertain if liquidity levels improved in the post-reform period. We estimate the change in liquidity levels through the use of a proxy measure of liquidity, namely the benchmark bond theoretical versus market yield error. We examine the determinants of the proxy measure of market liquidity, and estimate which of the explanatory variables carries the greatest weight in influencing liquidity levels. We identify those factors that contributed most to maintaining secondary market liquidity and thereby draw conclusions of potential value to sovereign bond market monetary authorities.
Article
Full-text available
Let n observations Y 1, Y 2, ···, Y n be generated by the model Y t = pY t−1 + e t , where Y 0 is a fixed constant and {e t } t-1 n is a sequence of independent normal random variables with mean 0 and variance σ2. Properties of the regression estimator of p are obtained under the assumption that p = ±1. Representations for the limit distributions of the estimator of p and of the regression t test are derived. The estimator of p and the regression t test furnish methods of testing the hypothesis that p = 1.
Article
Full-text available
This collection of published papers records the development of an approach to econometric modelling that has reached a highly successful stage. The methodology of modelling ‘observational data’, as opposed to experimental data, which can be replicated, is analysed to highlight the fundamental flaws in various approaches, and the possibilities of others. Criteria for model adequacy are formulated (congruence and encompassing), and alternative approaches to building empirical models are compared on their ability to deliver such models. A typology of models elucidates their properties, and a taxonomy of information sources clarifies testing. Estimation is summarized by an estimator generating equation. The value of exploring the development path is to reveal by attempted applications why many widely used approaches are inadequate. The outcome is to demonstrate the viability of a general‐to‐specific approach that commences from a specification deemed more than adequate to characterize the evidence, and simplifies to a parsimonious representation that captures the main factors. By artificial Monte Carlo simulations on experiments designed by others, the success of that approach is established, leading to automatic model selection by software that can outperform practitioners.
Article
We use the Lagrange multiplier procedure to derive efficient joint tests for residual normality, homoscedasticity and serial independence. The tests are simple to compute and asymptotically distributed as χ2.
Article
This paper aims to assess the impact of the abolition of U.K. exchange control on the degre of integration of U.K. and overseas stock markets. Using cointegration techniques, we find that although there is no significant increase in the correlation of short-run stock market returns for the United Kingdom and certain overseas markets post 1979, there does appear to be a marked increase in the degree to which these markets move together in the long run after this date--there appears to be no long-run gain from diversification. Since cointegration of two variables implies that at least one of them can be used to help forecast the other, our findings also imply the inefficiency of a number of stock markets. Copyright 1989 by MIT Press.
Article
This paper develops some new tests for structural hypotheses in the framework of a multivariate error correction model with Gausian errors. The tests are constructed by an analysis of the likelihood function and motivated by an empirical investigation of the PPP relation and the UIP relation for the United Kingdom. Three types of tests are discussed. First, the authors' consider the same linear restrictions on all cointegration relations, then they consider the hypothesis that certain relations are assumed to be cointegrating, and finally they formulate a general hypothesis that contains the previous ones. This hypothesis can be expressed by the conditions that some of the cointegrating relations are subject to given linear restrictions, while others are unconstrained.
Article
This paper gives a systematic application of maximum likelihood inference concerning cointegration vectors in non-stationary vector valued autoregressive time series models with Gaussian errors, where the model includes a constant term and seasonal dummies. The hypothesis of cointegration is given a simple parametric form in terms of cointegration vectors and their weights. The relation between the constant term and a linear trend in the non-stationary part of the process is discussed and related to the weights. Tests for the presence of cointegration vectors, both with and without a linear trend in the non-stationary part of the process are derived. Then estimates and tests under linear restrictions on the cointegration vectors and their weights are given. The methods are illustrated by data from the Danish and the Finnish economy on the demand for money. Copyright 1990 by Blackwell Publishing Ltd
Article
The relationship between cointegration and error correction models, first suggested by Granger, is here extended and used to develop estimation procedures, tests, and empirical examples. A vector of time series is said to be cointegrated with cointegrating vector a if each element is stationary only after differencing while linear combinations a8xt are themselves stationary. A representation theorem connects the moving average , autoregressive, and error correction representations for cointegrated systems. A simple but asymptotically efficient two-step estimator is proposed and applied. Tests for cointegration are suggested and examined by Monte Carlo simulation. A series of examples are presented. Copyright 1987 by The Econometric Society.
Article
This paper considers the null hypothesis that the errors on a regression equation form a random walk. By using the standard Durbin-Watson assumptions, we derive three test statistics that are uniformly most powerful against the alternative hypothesis that the errors are being generated by the stationary first order Markoff process. Unfortunately, the tabulated lower and upper bounds are too wide apart and so we compare the powers of the three tests using simulated as well as economic data. It is then recommended that the Imhof routine should be attached to standard regression programs to calculate the exact limit of the Berenblut-Webb statistic.