Impact of Us Volatility on Indian Bond Market

                    Impact of US volatility on Indian bond market

Abstract:

This paper tries to explain the behavior of Indian Bond market with respect to volatility in US and UK financial market. This paper tries to find out the important factors that are affecting the Indian Bond Return directly or indirectly. During this analysis three major bond markets Indian Bond, UK and U.S. Bond and one Indian exchange, NSE are taken as poignant factors.

The study reveals that volatility in all the markets surges post the global financial crisis of 2008-09. Spillovers in volatility across the markets are found to be present due to both innovations effects as well as volatility persistence.

Introduction:

The emerging markets like India have become one of the asset allocation classes for the international portfolio allocation (Harvey, 1995). There are many international capital inflows from developed countries to Indian bond market and most capital inflow was concentrated in

the Asia and Latin America during 1990s after the debt crisis of the mid-1980

(López-Mejía, 1999; Bekaert and Harvey, 2003).

In addition, as the lowering of trade barriers between countries, the international trade has increased substantially in recent years. Therefore, it is important for US and Indian investors to understand the transmission mechanism between markets and the correlation structure between emerging bond markets for their portfolio risk management.

Indian bond markets appear to exhibit relatively low correlations with the developed capital markets. Although emerging markets have long been characterized by their high volatility and with different sources of risks and returns from developed countries, most emerging market countries in Eastern Europe, Asia and Latin America currently are more financially sound than several years ago owing to the liberalization of their trade and financial systems and macroeconomic stabilization (Bekaert and Harvey, 2003). However, much research focuses on the issue of emerging equity markets, but seldom on emerging bond markets.

The study of the volatility of bond market returns is not only important for predicting market returns or bond yields (Cai, Jiang, and Kumar, 2004; Fleming, Kirby, and Ostdiek, 2001), but also helps investors understand the behavior and source of cross-market volatility transmission for the purpose of international diversification, risk management, asset pricing and making asset allocation decision. Hence, it is natural to raise the question of measurement of risk and the volatility of returns in emerging market assets and the interdependence across countries.Of more specific interest is the degree of integration of emerging markets. Because of the globalization and liberalization of world economy, investors can assess to the global

Financial markets more rapidly via electronic trading technologies, also the transmission of News becomes more easily. As a result, the formation of economy zone, trade organization and financial liberalization may change the relationship of financial capital market presented in the previously researches, especially, in the emerging market economy.

This paper examines the strength of correlation between US bond market and Indian bond market. Johansen cointegration test has been used for this matter. Different correlation techniques has been studied and applied to this paper.

Literature Review:

1. Estimating the Impacts of U.S. LSAPs on Emerging Market Economies’ Local Currency Bond Markets (Jeffrey Moore, Sunwoo Nam, Myeongguk Suh, and Alexander Tepper Federal Reserve Bank of New York Staff Reports, no. 595) January 2013: This paper examines whether large-scale asset purchases (LSAPs) by the Federal Reserve influenced capital flows out of the United States and into emerging market economies (EMEs) and also analyzes the degree of pass-through from long-term U.S. government bond yields to long-term EME bond yields. Using panel data from a broad array of EMEs, the empirical estimates suggest that a 10-basis-point reduction in long-term U.S. Treasury yields results in a 0.4-percentage-point increase in the foreign ownership share of emerging market debt. This, in turn, is estimated to reduce government bond yields in EMEs by approximately 1.7 basis points.