We investigate the extent of financial integration in both short and long term government debt markets of five South Asian economies from January 2004 to May 2016. We employ copula functions and find weak dependencies in their short and long term debt markets. We supplement our analysis using Diebold and Yilmaz spillover index and find low level of return spillover across both short and long term debt markets, thereby reconfirming low level of financial integration in the debt markets of the region. Linkages between short and long term debt markets are also weak suggesting underdeveloped nature of these markets.
KeywordsShort Term Debt Market IntegrationLong Term Debt Market IntegrationSouth AsiaTime Varying CopulaDiebold and Yilmaz
Burger, J.D., Warnock, F.E. and Warnock, V.C. (2015) Bond Market Development in Developing Asia. Asian Development Bank Economics Working Paper Series No. 448. https://doi.org/10.2139/ssrn.2707539
Abad, P., Chuliá, H. and Gómez-Puig, M. (2010) EMU and European Government Bond Market Integration. Journal of Banking & Finance, 34, 2851-2860. https://doi.org/10.1016/j.jbankfin.2009.10.009
World Bank (2015) South Asia Economic Focus, Spring 2015: Making the Most of Cheap Oil. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/21735
World Bank (2014) South Asia Regional Brief. http://www.worldbank.org/en/news/feature/2014/03/24/south-asia-regional-brief
Kumar, M.S. and Okimoto, T. (2011) Dynamics of International Integration of Government Securities Markets. Journal of Banking and Finance, 35, 142-154. https://doi.org/10.1016/j.jbankfin.2010.07.019
Yang, L. and Hamori, S. (2014) Dependence Structure between CEEC-3 and German Government Securities Markets. Journal of International Financial Markets, Institutions and Money, 29, 109-125. https://doi.org/10.1016/j.intfin.2013.12.003
Diebold, F.X. and Yilmaz, K. (2012) Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers. International Journal of Forecasting, 28, 57-66. https://doi.org/10.1016/j.ijforecast.2011.02.006
Kim, S.J., Lucey, B.M. and Wu, E. (2006) Dynamics of Bond Market Integration between Established and Accession European Union Countries. Journal of International Financial Markets, Institutions and Money, 16, 41-56. https://doi.org/10.1016/j.intfin.2004.12.004
Laopodis, N.T. (2008) Government Bond Market Integration within European Union. International Research Journal of Finance and Economics, 19, 56-76.
Pozzi, L. and Wolswijk, G. (2012) The Time-Varying Integration of Euro Area Government Bond Markets. European Economic Review, 56, 36-53. https://doi.org/10.1016/j.euroecorev.2011.05.006
Georgoutsos, D.A. and Migiakis, P.M. (2013) European Sovereign Bond Spreads: Financial Integration and Market Conditions. Applied Financial Economics, 23, 1609-1621. https://doi.org/10.1080/09603107.2013.842637
Abad, P., Chuliá, H. and Gómez-Puig, M. (2014) Time-Varying Integration in European Government Bond Markets. European Financial Management, 20, 270-290. https://doi.org/10.1111/j.1468-036X.2011.00633.x
Christiansen, C. (2014) Integration of European Bond Markets. Journal of Banking & Finance, 42, 191-198. https://doi.org/10.1016/j.jbankfin.2014.01.022
Cipollini, A., Coakley, J. and Lee, H. (2015) The European Sovereign Debt Market: From Integration to Segmentation. The European Journal of Finance, 21, 111-128. https://doi.org/10.1080/1351847X.2013.788535
Deltuvaite, V. (2015) Investigation of Global Integration of the Central and Eastern European Countries Sovereign Bond Markets. Procedia Economics and Finance, 24, 182-191. https://doi.org/10.1016/S2212-5671(15)00643-7
Gupta, P., Sehgal, S. and Deisting, F. (2015) Time-Varying Bond Market Integration in EMU. Journal of Economic Integration, 30, 708-760. https://doi.org/10.11130/jei.2015.30.4.708
Yang, L. and Hamori, S. (2015) Interdependence between the Bond Markets of CEEC-3 and Germany: A Wavelet Coherence Analysis. The North American Journal of Economics and Finance, 32, 124-138. https://doi.org/10.1016/j.najef.2015.02.003
Simovic, P.P., Tkalec, M., Vizek, M. and Lee, J. (2016) Time-Varying Integration of the Sovereign Bond Markets in European Post-Transition Economies. Journal of Empirical Finance, 36, 30-40. https://doi.org/10.1016/j.jempfin.2015.12.005
Vo, X.V. (2009) International Financial Integration in Asian Bond Markets. Research in International Business and Finance, 23, 90-106. https://doi.org/10.1016/j.ribaf.2008.07.001
Rughoo, A. and You, K. (2015) Asian Financial Integration: Global or Regional? Evidence from Money and Bond Markets. International Review of Financial Analysis, 48, 419-434. https://doi.org/10.1016/j.irfa.2015.03.007
Sowmya, S., Prasanna, K. and Bhaduri, S. (2016) Linkages in the Term Structure of Interest Rates across Sovereign Bond Markets. Emerging Markets Review, 27, 118-139. https://doi.org/10.1016/j.ememar.2016.05.001
Ciner, C. (2007) Dynamic Linkages between International Bond Markets. Journal of Multinational Financial Management, 17, 290-303. https://doi.org/10.1016/j.mulfin.2007.02.007
Bekaert, G. and Harvey, C.R. (1995) Time-Varying World Market Integration. The Journal of Finance, 50, 403-444. https://doi.org/10.1111/j.1540-6261.1995.tb04790.x
Barr, D.G. and Priestley, R. (2004) Expected Returns, Risk and the Integration of International Bond Markets. Journal of International Money and Finance, 23, 71-97. https://doi.org/10.1016/j.jimonfin.2003.10.005
Engsted, T. and Tanggaard, C. (2007) The Comovement of US and German Bond Markets. International Review of Financial Analysis, 16, 172-182. https://doi.org/10.1016/j.irfa.2006.03.002
Laopodis, N.T. (2010) Dynamic Linkages among Major Sovereign Bond Yields. The Journal of Fixed Income, 20, 74. https://doi.org/10.3905/jfi.2010.20.1.074
Piljak, V. (2013) Bond Markets Co-Movement Dynamics and Macroeconomic Factors: Evidence from Emerging and Frontier Markets. Emerging Markets Review, 17, 29-43. https://doi.org/10.1016/j.ememar.2013.08.001
Piljak, V. and Swinkels, L. (2015) Frontier and Emerging Government Bond Markets. Emerging Markets Review.
Rodriguez, J.C. (2007) Measuring Financial Contagion: A Copula Approach. Journal of Empirical Finance, 14, 401-423. https://doi.org/10.1016/j.jempfin.2006.07.002
Longin, F. and Solnik, B. (2001) Extreme Correlation of International Equity Markets. The Journal of Finance, 56, 649-676. https://doi.org/10.1111/0022-1082.00340
Poon, S.-H., Rockinger, M. and Tawn, J. (2004) Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications. The Review of Financial Studies, 17, 581-610. https://doi.org/10.1093/rfs/hhg058
Christoffersen, P.F. (2012) Elements of Financial Risk Management. Academic Press, Cambridge.
Patton, A.J. (2006b) Estimation of Multivariate Models for Time Series of Possibly Different Lengths. Journal of Applied Econometrics, 21, 147-173. https://doi.org/10.1002/jae.865
Sklar, A. (1959) Fonctions de répartition à n dimensions etleursmarges. Publications de l’Institut de Statistique de Paris, 8, 229-231.
Basher, S.A., Salem, N. and Hui, Z. (2014) Dependence Patterns across Gulf Arab Stock Markets: A Copula Approach. Journal of Multinational Financial Management, 25-26, 30-50. https://doi.org/10.1016/j.mulfin.2014.06.008
Delatte, A.L. and Lopez, C. (2013) Commodity and Equity Markets: Some Stylized Facts from a Copula Approach. Journal of Banking & Finance, 37, 5346-5356. https://doi.org/10.1016/j.jbankfin.2013.06.012
Nelson, D.B. (1991) Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica: Journal of the Econometric Society, 59, 347-370. https://doi.org/10.2307/2938260
Kim, M.S. and Wang, S. (2006) On the Application of Stochastic Volatility Models. Computational Statistics & Data Analysis, 51, 2210-2217. https://doi.org/10.1016/j.csda.2006.08.002
Mandelbrot, B.B. (1963) The Variation of Certain Speculative Prices. Journal of Business, 36, 392-417. https://doi.org/10.1086/294632
Bollerslev, T. (1987) A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return. Review of Economics and Statistics, 69, 542-547. https://doi.org/10.2307/1925546
Fernandez, V. (2008) Copula-Based Measures of Dependence Structure in Assets Returns. Physica A: Statistical Mechanics and Its Applications, 387, 3615-3628. https://doi.org/10.1016/j.physa.2008.02.055
Gumbel, E.J. (1960) Bivariate Exponential Distributions. Journal of the American Statistical Association, 55, 698-707. https://doi.org/10.1080/01621459.1960.10483368
Clayton, D.G. (1978) A Model for Association in Bivariate Life Tables and Its Application in Epidemiological Studies of Familial Tendency in Chronic Disease Incidence. Biometrika, 65, 141-152. https://doi.org/10.1093/biomet/65.1.141
Genest, C., Rémillard, B. and Beaudoin, D. (2009) Goodness-of-Fit Tests for Copulas: A Review and a Power Study. Insurance: Mathematics and Economics, 44, 199-213. https://doi.org/10.1016/j.insmatheco.2007.10.005
Kojadinovic, I. and Yan, J. (2011) A Goodness-of-Fit Test for Multivariate Multiparameter Copulas Based on Multiplier Central Limit Theorems. Statistics and Computing, 21, 17-30. https://doi.org/10.1007/s11222-009-9142-y
Aloui, R., Hammoudeh, S. and Nguyen, D.K. (2013) A Time-Varying Copula to Oil and Stock Market Dependence: The Case of Transition Economies. Energy Economics, 39, 208-221. https://doi.org/10.1016/j.eneco.2013.04.012
Koop, G., Pesaran, M.H. and Potter, S.M. (1996) Impulse Response Analysis in Nonlinear Multivariate Models. Journal of Econometrics, 74, 119-147. https://doi.org/10.1016/0304-4076(95)01753-4
Pesaran, H.H. and Shin, Y. (1998) Generalized Impulse Response Analysis in Linear Multivariate Models. Economics Letters, 58, 17-29. https://doi.org/10.1016/S0165-1765(97)00214-0
Dickey, D.A. and Fuller, W.A. (1979) Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74, 427-431.
Kwiatkowski, D., Phillips, P.C.D., Schmidt, P. and Shin, Y. (1992) Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root? Journal of Econometrics, 54, 159-178. https://doi.org/10.1016/0304-4076(92)90104-Y
Phillips, C.B.P. and Perron, P. (1988) Testing for a Unit Root in Time Series Regression. Biometrika, 75, 335-346. https://doi.org/10.1093/biomet/75.2.335
Sehgal, S., Pandey, P. and Deisting, F. (2018) Time Varying Integration amongst the South Asian Equity Markets: An Empirical Study. Cogent Economics & Finance, 6.
Sehgal, S., Pandey, P. and Deisting, F. (2017) Examining Dynamic Currency Linkages amongst South Asian Economies: An Empirical Study. Research in International Business and Finance, 42, 173-190.
Park, C.Y. (2016) Developing Local Currency Bond Markets in Asia. Asian Development Bank Economics Working Paper Series No. 495. https://doi.org/10.2139/ssrn.2856248