Abstract:
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.
