Volatility Transmission in Asian Bond Markets: Tests of Portfolio Diversification

Abstract

The 1997 Asian crisis illustrated the need to develop local bond markets to reduce vulnerabilities to future mismatches in currency and maturity. This article examines a regional initiative – the Pan-Asian Bond Index Fund – and tests the implications for portfolio diversification. Intra- and inter-regional transmission of bond market volatilities between Hong Kong, Singapore and South Korea and from the United States and Japan is investigated. The results show that since Hong Kong and Singapore are highly integrated into global capital markets, the prospects of diversification of investment become undermined. The study provides evidence to assist policy makers in designing bond-index funds as a strategy for portfolio diversification to promote regional bond markets.

Keywords:

• Asia
• bond-index funds
• East Asian bond markets
• Global
• international financial markets

Notes

¹ These are the central banks and monetary authorities in Australia, China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea and Thailand.

² See http://asianbondsonline.adb.org/asiabondindicators/yld_volatility.php