Workng Paper 10/2007 21 June 2007 ASSESSING BOND MARKET INTEGRATION IN ASIA Prepared by Ip-wng Yu, Laurence Fung and Ch-sang Tam 1 Research Deparmen Absrac Developmen of he local bond markes has been a op prory for fnancal reforms n he regon afer he Asan fnancal crss. Varous naves have also been aken o foser he developmen of he regonal bond marke. Ths paper looks no he degree of negraon of soveregn (governmen) bond markes n Asa. I provdes a survey of ndcaors and measures o monor he developmen, measure progress and assess he sae of bond marke negraon n he regon. Our emprcal resuls broadly show ha here s only weak bond marke negraon n he regon and very lle progress has aken place snce 2003. The apparen lack of progress may be due o he local or dosyncrac facors n some Asan economes. JEL Classfcaon Numbers: C13; C22; F36; G15 Keywords: Fnancal negraon; Kalman fler; Conegraon; Synchronsaon; Dynamc correlaon Auhor s E-Mal Address: Ip-wng_Yu@hkma.gov.hk; Laurence_KP_Fung@hkma.gov.hk; Ch-sang_Tam@hkma.gov.hk The vews and analyss expressed n hs paper are hose of he auhors, and do no necessarly represen he vews of he Hong Kong Moneary Auhory. 1 The auhors are graeful o Hans Genberg and Cho-ho Hu for her suggesons and commens.
- 2 - Execuve Summary: Ths sudy provdes a survey of ndcaors for he purpose of assessng he rend of bond marke negraon among en Asan economes: Japan, Manland Chna, Hong Kong, Tawan, Korea, Sngapore, Malaysa, Thaland, Indonesa, and he Phlppnes. Compared o oher measures, hese ndcaors gve mely assessmen of he exen of negraon. A well balanced fnancal sysem s a key o mananng fnancal sably n he Asan regon. Deeper and more negraed bond markes may faclae rsk managemen, enhance reurn-rsk profles and provde effcency gans. Despe he poenal benefs and repeaed calls for developng broad and deep bond markes, bond markes n Asa are sll no well developed and may hnder he negraon process. The ndcaors pon o a very lmed progress over he years n achevng greaer regonal fnancal negraon n he governmen bond markes. They sugges eher salled or even regressve processes. The resuls are n lne wh oher alernave measures regardng bond marke negraon n he regon. The apparen lack of progress n bond marke negraon may be due o local or dosyncrac facors such as cred or lqudy rsks n some economes, as well as he under-developmen of many local bond markes n he regon. I s hus essenal for cenral banks n he regon o focus on he developmen of her domesc bond markes.
- 3 - I. INTRODUCTION Snce he Asan fnancal crss n 1997-1998, economes n he regon have made effors o dversfy her relance on he bankng secor as he man source of fundng channel n favour of oher fnancal nermedares such as eques and bonds. In parcular, he developmen of local bond markes has been a op prory n he fnancal reform of Asan economes, as a balanced fnancal sysem wh more fundng channels s beleved o be one of he keys n mananng fnancal sably. Inernaonally, varous naves have also been n place o foser he developmen of a regonal bond marke. These naves are par of he campagn o promoe cooperaon among he Asan governmens n he fnancal marke developmen. 2 Wh ncreasng nra-regonal rade and cross-border drec nvesmen n Asa, here s a queson of wheher cross-counry capal marke negraon n he regon wll follow. Undersandng he exen of fnancal negraon and monorng s progress n he regon s mporan for Asan cenral banks. On he one hand, fnancal negraon may promoe fnancal developmen and hence enhance economc growh n he regon. 3 On he oher hand, a hghly negraed fnancal marke may faclae he ransmsson of he mpacs of moneary polces from one economy o he ohers. A mes of fnancal crss, hs conagon may have mporan consequence on he fnancal sably. Therefore, s essenal o have approprae measures for he assessmen and close monorng of he progress of fnancal marke negraon. 4 Ths sudy looks no he negraon of soveregn (governmen) bond markes n Asa and provdes a survey of ndcaors and measures o monor he developmen, measure progress and assess he saus of bond marke negraon n he regon. 5 In parcular, aemps o address he followng quesons: To wha exen are he bond markes n he regon negraed? Wha s he evoluon and he curren level of bond marke negraon? Is progressng, a a sandsll, or even regressng? Wha s he relave mporance of regonal (whn Asa) vs. global (manly he US) facors n nra-regonal bond marke negraon? 6 2 3 4 5 6 Two man naves relang o he developmen of regonal bond marke nclude he Asan Bond Fund (ABF) esablshed by he eleven members of he Execuves Meeng of Eas Asa-Pacfc Cenral Bank (EMEAP) and he Asan Bond Marke Inave (ABMI) by Asan Plus Three (APT) economes. See Park and Park (2005). As De Brouwer and Corbe (2005) poned ou, fnancal marke negraon creaes a se of powerful nernal pressure for fnancal reform and developmen, hrough encouragemen of furher fnancal lberalsaon and upgradng of fnancal capacy. The nformave value of hese negraon measures or ndcaors s hghlghed by he publcaons from he European Cenral Bank (ECB) and he European Commsson (EC) as an on-gong effor o monor he degree of fnancal negraon n he Euro area. See ECB (2005) and EC (2005). See Yu e al. (2007) for a sudy on he equy marke negraon n Asa. The focus of hs paper s o provde varous ndcaors for assessng he rend and he progress of bond marke negraon n he regon. The polcy mplcaons wh regard o a fully negraed bond marke are no dscussed n hs paper. For a dscusson of he polcy mplcaons from negraon, see De Brouwer and Corbe (2005) and Park and Park (2005).
- 4 - The remander of hs paper s organsed as follows. In Secon II, we presen he varous negraon ndcaors. Daa used n he sudy and some prelmnary analyses of he daa seres are gven n Secon III. Esmaon resuls from he negraon ndcaors are presened and her behavours are examned n Secon IV. Secon V provdes a summary and dscusson. II. INDICATORS OF BOND MARKET INTEGRATION IN ASIA Unlke equy marke negraon, here are few emprcal works on bond marke negraon n Asa. The sudy by Danareksa Research Insue (2004) uses he 10-year governmen bond benchmark yeld o examne he saus of governmen bond marke negraon n he ASEAN+3 group of economes, and fnds no sgnfcan convergence paern. I concludes ha he underdeveloped bond markes n mos Eas Asan counres are manly responsble for he slow convergence n he bond marke yeld n he regon. Asan Developmen Bank (2005) noes ha cross-counry dfferenals n bond yelds have been declnng. Alhough hese dfferenals reman sgnfcanly hgh, here s a sgn of ncreased co-movemen n bond yelds, suggesng ha bond marke negraon s makng progress. Usng daa from he nernaonal bond marke and he nernaonal syndcaed loan marke, McCauley e al. (2002) show ha Eas Asan nvesors and banks have on average allocaed half of he funds n bonds underwren and loans syndcaed for borrowers n Eas Asa. Based on hs measure, hey asser ha he fnancal markes of Eas Asa are more negraed han wha s ofen suggesed. To provde a beer undersandng of he drecon of bond marke negraon n Asa, hs sudy presens a survey of prce-based ndcaors derved from hgh frequency daa for he assessmen. These ndcaors are eher sascal measures or derved from models and hey provde mely measure for regular monorng purposes. 7 Some of hese ndcaors follow he approach of he European Cenral Bank (see ECB (2005)) whle ohers make use of he recen advances n he leraure n measurng he me-varyng degree of negraon. I s worh nong ha fnancal marke negraon has dfferen dmensons and s defnon vares dependng on he focus of he sudy. For nsance, he bond reurn dsperson ndcaor ulses he dea of reurn convergence as a measure of negraon, whereas he correlaon analyss uses he exen of reurn comovemen as an ndcaon of he degree of negraon. Gven ha he dervaons of hese ndcaors are subjec o echncal lmaons and model assumpons, and ha he dmensons n whch hese ndcaors are nended o measure are dfferen, he emprcal resuls obaned from hem may gve somewha dfferen assessmen as o he exen and he speed of bond marke negraon n he regon. Therefore, hese ndcaors should be 7 There s no unversal defnon on fnancal negraon. In he leraure, wo ypes of measures are commonly used o assess he degree of fnancal negraon: prce-based measures and quany-based measures. See Adam e al. (2002) and Baele e al. (2003) for more deals.
- 5 - nerpreed wh cauon and aken as ndcave bu no conclusve evdences on assessng he bond marke negraon. If possble, hey should be supplemened by oher negraon measures lke he cross-border holdngs of Asan deb secures n regulaor s monorng work. 8 Table 1 summarses he ndcaors n he sudy. 9 Dealed dscussons on he mehodologes of consrucng hese ndcaors and her nerpreaon are presened n he Appendx. 8 9 These alernave measures may no be as mely and frequen as he ndcaors presened n hs paper. I should be noed ha mos of hese aggregae ndcaors are obaned by akng he smple average of he ndcaors esmaed for ndvdual economes. However, as he sarng daes of he daa n hs sudy are dfferen (and so are her esmaed ndcaors), he number of ndvdual ndcaors beng averaged wll ncrease over me. For nsance, governmen bond yeld daa were no avalable n Indonesa before January 2003. Thus, he esmaed ndcaors for Indonesa are no ncluded n he aggregaon unl January 2003. In hs regard, he nerpreaon of he general rend of hese aggregae ndcaors should be aken wh cauon.
- 6 - Table 1. Summary of Inegraon Indcaors for Asan Governmen Bond Markes Mehod Indcaor Indcaon of marke negraon a. Cross-counry bond reurn dsperson and dfferenal b. Haldane and Hall (1991) Kalman fler mehod c. Dynamc conegraon analyss d. Marke cycle synchronsaon e. Bea convergence of bond reurn f. Dynamc condonal correlaon (DCC) model Reurn dsperson and maxmum-mnmum reurn dfferenal Tme-varyng β esmaed va Kalman fler Rollng esmaes of he sandardsed race sascs and he number of conegrang vecors Rollng concordance ndex (RCI) Condonal bea esmaes from rollng GARCH esmaons Tme-varyng correlaon esmaed from he DCC model Lower reurn dsperson and smaller reurn dfferenal mply hgher reurn convergence The average β moves owards zero ndcaes an ncreasng sensvy o regonal nfluence Sandardsed race sasc conssenly greaer han one ndcaes he presence of a long-run relaonshp beween bond markes An upward rend n he RCI sgnals ncreased marke concordance The larger he esmaed condonal bea owards one, he greaer he marke negraon The hgher he correlaon, he larger he reurn comovemen beween markes and he greaer he marke negraon Noes: The ndcaors derved from he cross-counry bond reurn dsperson and dfferenal analyss, he bea convergence of bond reurn and he dynamc condonal correlaon model are based on he holdng perod reurns for governmen bond (bond reurns) as dscussed n Shller (1979). For he Haldane and Hall Kalman fler mehod, he dynamc conegraon analyss and he marke cycle synchronsaon, he ndcaors are based on he bond ndces whch are calculaed from he bond reurn seres. III. THE DATA AND THEIR TIME SERIES PROPERTIES Ten economes n he Asan regon are covered n hs sudy, namely Japan, he Manland, Hong Kong, Tawan, Korea, Sngapore, Malaysa, Thaland, Indonesa, and he Phlppnes. In addon o aggregae ndcaor for all hese economes, ndcaors for regonal blocs are also consruced. These regonal blocs nclude:
- 7 - a. Greaer Chna regon: he Manland, Hong Kong and Tawan b. Four-dragon bloc: Hong Kong, Tawan, Korea and Sngapore c. Asan emergng regon: Malaysa, Thaland, Indonesa and he Phlppnes Governmen bond yelds wh maury of 2-year, 5-year and 10-year from hese en Asan economes are examned. 10 As governmen bond ssuances vary beween economes, each bond yeld seres has dfferen sarng daes and maures (see Table 2). The US Treasury Bond yelds of correspondng maures are used as proxes for world nfluence (or common news facor). The regonal nfluence proxes of dfferen maures wll be he unweghed cross-counry governmen bond reurn average of he correspondng maures, or he JP Morgan EMBIG Asa Soveregn reurn. 11 The dervaons of negraon ndcaors are based on he holdng perod reurns (bond 12, 13 reurns) n erms of he US dollar. Smlar o oher sudes n he leraure, mos of he ndcaors derved n hs paper are based on daly reurns. 14 The use of hgh frequency daa allows us o assess he negraon process n a more mely manner. 10 11 12 13 14 For Hong Kong, bond yelds are hose of Exchange Fund Noes (EFN) of correspondng maures. The choce of regonal proxy s dfferen n dfferen negraon measures. For he Haldane and Hall Kalman fler mehod and he marke cycle synchronsaon, he proxy s he unweghed cross-counry governmen bond ndex average of he correspondng maures. For each bond marke, hs regonal benchmark bond reurn proxy s calculaed as he average cross-counry bond reurn of he correspondng maury, excludng he bond reurn of ha marke self. For nsance, when calculang he 10-year regonal benchmark bond reurn for Hong Kong, he 10-year EFN reurn of Hong Kong s excluded from he cross-counry average calculaon. On he oher hand, he JP Morgan EMBIG Asa Soveregn reurn s used as he regonal bond marke proxy for all economes for he esmaons of he dynamc condonal correlaons for he 10-year bond reurns. Wh a common regonal bond marke proxy, wll reduce he number of daa seres used n he esmaons and hus make he esmaon process more effcen. In hs sudy, he bond reurn s approxmaed by he daly holdng perod reurn for a governmen bond based on Shller (1979). For bonds sellng a or near par value, (n) Shller suggess an approxmae expresson for he n-perod holdng perod reurn H, ( n) ( n) ( n 1) n 1 n 1 n (n) where H = ( R γ n R + 1 ) /(1 γ ), γ n = γ (1 γ ) /(1 γ ), γ = 1/(1 + R), R s he yeld o maury and R s he mean value of he yeld o maury. Once he local currency bond reurn s calculaed, s expressed n erms of he US dollar by dvdng he local currency bond reurn by he daly percenage change n he local currency per US dollar exchange rae. The ndcaors derved from he cross-counry bond reurn dsperson and dfferenal analyss, he bea convergence of bond reurn and he dynamc condonal correlaon model are based on he bond reurns. For he Haldane and Hall Kalman fler mehod, he dynamc conegraon analyss and he marke cycle synchronsaon, he ndcaors are based on he bond ndces whch are calculaed from he bond reurn seres. In he negraon leraure, s common o express he asse reurns n erms of he same currency. In fac, he exchange rae volaly has lle mpac on he resuls of he negraon ndcaors n hs sudy. In he prelmnary analyss, we use he bond yelds (n local currency erms) o calculae he ndcaors. When comparng he resuls presened n hs paper wh hose from he prelmnary analyss, her general rends are very smlar and he acual levels of he ndcaors beween he wo resuls are slghly dfferen, Excep for he esmaon of he dynamc condonal correlaon ndcaor where he bond reurn s for one week, oher ndcaors are derved based on he one-day bond reurn.
- 8 - Table 2. Governmen Bond Yelds Bond yeld daa sarng dae 2-year 5-year 10-year Hong Kong 1, Japan, Korea 2, Malaysa, he Phlppnes Jan-96 Jan-96 Oc-96 and he US Treasury bond Chna NA May-04 May-01 Tawan Jul-02 Jun-02 Oc-96 Sngapore Jul-97 Jan-96 Jun-98 Thaland Sep-99 Sep-99 Oc-96 Indonesa Jan-03 Jan-03 Jul-03 JP Morgan EMBIG Asa Soveregn yeld Dec-97 Noes: 1. Yelds are hose of Exchange Fund Noes of correspondng maures. 2. 3-year governmen bond yeld n Korea s used nsead of 2-year. Sources: Bloomberg, CEIC, Daasream and IMF. To conduc conegraon analyss, he non-saonary propery of he daa seres n queson mus be esablshed. Table 3 shows he Phllps-Perron (PP) es o deermne he un roo propery of he governmen bond ndces. Furhermore, Tables 4 and 5 presen, respecvely, he Ljung-Box es resuls for seral correlaon on he squared level of he daly and weekly governmen bond reurn seres. 15 Table 3. Saonary Tes of Governmen Bond Indces PP un roo es On he level On he frs dfference 2-year 5-year 10-year 2-year 5-year 10-year The Manland - -8-1.43 - -39.80* -36.04* Hong Kong -6-0.96-0.91-50.76* -51.84* -48.40* Tawan -1.94-2.46-1 -37.63* -38.27* -52.18* Japan -2.44-2.14-2.14-54.62* -53.42* -49.96* Korea 5 0.12 0.14-48.29* -47.94* -46.78* Sngapore -2.11-1.48-1.39-45.01* -49.21* -44.63* Malaysa -4-8 -0.53-46.97* -47.10* -45.52* Thaland -1.51-1.87-6 -39.86* -34.06* -50* Indonesa -2.36-2.58-1.73-30* -29.42* -36* The Phlppnes -1.32-0.75-0.59-46.79* -44.24* -53.43* Noes: * ndcaes sgnfcance a he 5% confdence level. The crcal value a he 5% level of he PP es s -2.87. 15 Weekly bond reurns are derved from weekly bond yeld seres. See Foonoe 12 for he dervaon of he bond reurn.
- 9 - The resuls of he PP es n Table 3 show ha all benchmark governmen bond ndces are non-saonary n he level (he null hypohess of he presence of un roo canno be rejeced) bu saonary n he frs dfference. Gven ha hese bond ndces possess un roos, he Johansen (1988) procedure can be appled, based on a rollng wndow wh consan sample sze, o consder wheher he ndvdually nonsaonary bond ndces are conegrang. The Ljung-Box ess for seral correlaon, as shown by he Q sascs n Table 4, provde evdence of seral correlaon n he squared levels of he daly bond reurn seres. Thus, when dervng he bea convergence ndcaor, Equaon (4) n he Appendx s esmaed under a GARCH(1,1) specfcaon for each governmen bond reurn seres. Table 4. Seral Correlaon Tess of Daly Governmen Bond Reurns Ljung-Box Q(8) es sascs 2-year 5-year 10-year The Manland - 138.01* 35.76* Hong Kong 207.71* 152.31* 147.87* Tawan 163.63* 217.77* 382.23* Japan 230.15* 192.53* 192.45* Korea 1,610.30* 1,782.8* 1,838.10* Sngapore 456.45* 443.97* 244.65* Malaysa 1,058.30* 1,007.60* 852.62* Thaland 237.57* 172.44* 113.82* Indonesa 48.76* 53* 57.13* The Phlppnes 427.07* 581* 443.36* The US 608.12* 795.09* 199.81* Noes: * ndcaes sgnfcance a he 5% confdence level. Q(8) s he Ljung-Box sascs based on he squared level of he daly bond reurn up o he 8 h order. The sascs are 2 2 asympocally dsrbued as χ (8). The crcal value of χ (8) a he 5% level s 15.5. The Ljung-Box es sascs n Table 5 show ha here are seral correlaons n he squared levels of mos of he weekly bond reurn seres. Therefore, unvarae GARCH models are frs esmaed for each bond reurn seres, and her sandardsed resduals wll hen be used n he DCC model n Equaons (5) and (6), as shown n he Appendx, o esmae he me-varyng condon correlaons beween bond reurns. 16 16 In he analyss ha followed, only he weekly bond reurns from governmen bonds wh 5 years and 10 years of maury are esmaed usng he DCC model. Thus, Table 5 only presens he Ljung-Box (Q) es sascs of hese wo bond reurn seres.
- 10 - Table 5. Seral Correlaon Tess of Weekly Governmen Bond Reurns 5-year Ljung-Box Q(4) es sascs 10-year The Manland 27.19* 5.38 Hong Kong 27.55* 36* Tawan 18.88* 23.73* Japan 3.36 4.08 Korea 280* 217.90* Sngapore 155.78* 27.16* Malaysa 115.50* 98.54* Thaland 5.34 131.54* Indonesa 7.83 16.70* The Phlppnes 19.88* 35.33* The US 25.38* 15* Noes: * ndcaes sgnfcance a he 5% confdence level. Q(4) s he Ljung-Box sascs based on he squared level of he weekly bond reurn up o he 4 h order. The sascs are 2 2 asympocally dsrbued as χ (4). The crcal value of χ (4) a he 5% level s 9.49. IV. ESTIMATION RESULTS AND PRESENTATION OF INTEGRATION INDICATORS a. Cross-counry reurn dsperson Smlar o ECB (2005), he cross-counry reurn dsperson s calculaed as he cross-marke sandard devaon of he daly reurns of he en Asan bond markes of 2-year, 5-year and 10-year maury respecvely. The reurn dsperson s flered usng he Hodrck-Presco smoohng echnque o reveal he long-erm rend of he seres. 17 A fallng reurn dsperson s aken as an ndcaon of ncreasng negraon and vce versa. 18 Char 1 presens he dspersons for bond reurns of 2-year, 5-year and 10-year maury. The 250-day movng average of maxmum-mnmum bond reurn dfferenals of regonal blocs are shown n Char 2. 17 18 The daly smoohng parameer of he Hodrck-Presco fler s 6,812,100, whch s se followng he frequency power rule of Ravn and Uhlg (2002) wh a power of 2. Whle a larger parameer number resuls n more smoohng, we fnd ha he general rend of he flered reurn dsperson s no affeced by he choce of he smoohng parameer. I s noed ha he perceved cred rsk or lqudy of he relevan governmen bonds could be dfferen even n a fully negraed marke. In hs case, he dsperson or dfferenal may no fall furher even when here s an ncreased negraon n he bond markes.
- 11 - Char 1. Hodrck-Presco Flered Cross-marke Bond Reurn Dsperson of Asan Economes Bass pons 200 200 160 2-year 160 120 120 80 5-year 80 40 10-year 40 0 Oc-96 Oc-97 Oc-98 Oc-99 Oc-00 Oc-01 Oc-02 Oc-03 Oc-04 Oc-05 0 Source: HKMA saff esmaes. Char 1 ndcaes ha he dspersons have declned from a hgh of 160 o 180 bass pons n early 1998 o around 40 and 65 bass pons n 2002. The fallng dsperson suggess an ncreasng rend of reurn convergence n he bond markes. However, here s no furher drop n he dspersons snce 2002. In fac, here are sgns for he dspersons o reurn o he upward rend snce lae 2004.
- 12-400 Char 2. 12-monh Movng Average of Maxmum-Mnmum Bond Reurn Dfferenal of Asan Economes Bass pons 500 2-year reurn dfferenal Asa 500 400 Bass pons 500 400 5-year reurn dfferenal Asa 500 400 300 200 Asan emergng regon Four-dragon bloc 300 200 300 200 Asan emergng regon Four-dragon bloc 300 200 100 0 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 100 0 100 Greaer Chna regon 0 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 100 0 Bass pons 500 400 300 200 10-year reurn dfferenal Asa Asan emergng regon Four-dragon bloc 500 400 300 200 100 Greaer Chna regon 0 Oc-97 Oc-99 Oc-01 Oc-03 Oc-05 100 0 Source: HKMA saff esmaes. Smlar paerns are also observed for he maxmum-mnmum bond reurn dfferenals n he graphs n Char 2. Among he hree regonal blocs, he greaer Chna regon has a relavely smaller bond reurn dfferenals han he ohers. The four-dragon bloc and he Asan emergng regon have smlar paerns and magnudes of bond reurn dfferenals, excep durng he perod of he Asan fnancal crss. I s noed ha snce lae 2005, he reurn dfferenals beween he bond markes n he Asan emergng regon are rendng upwards, whle hose of he oher wo regonal blocs reman seady. b. Haldane and Hall (1991) Kalman fler mehod For hs ndcaor, we ake he bond ndex of he US Treasury bond as he domnan exernal facor. The bond ndces of domnan regonal benchmarks are proxed by he average cross-counry bond ndces of he correspondng maures. 19 As shown n 19 For each economy, s regonal benchmark bond ndex s calculaed as he average cross-counry bond ndex of he correspondng maury, excludng he bond ndex of ha marke self. For nsance, when calculang he 2-year regonal benchmark bond ndex for Hong Kong, he 2-year EFN ndex of Hong Kong s excluded from he cross-counry average calculaon.
- 13 - he sgnal equaon of Equaon (1) n he Appendx, he esmaed β measures he sensves of ndvdual economy s governmen bond ndces o ha of he US relave o he regonal proxy. If he bond markes are more sensve o he movemens of her respecve regonal proxes, he esmaed β s wll be closer o zero, whch can be nerpreed as a sgn of negraon among he bond markes n he regon. 20 Any endency for β o move furher away from zero ndcaes reurn dvergence. Negave values of β sugges ha he bond marke drfs away from he regonal and US markes. Char 3 shows he paerns of unweghed average β s. Char 3. Average Haldane and Hall Sensvy Indcaor ( β ) of Asa by Maures (Equaon: Y RBM, Y, = α, + β, ( YRBM, YUS, ) + ε, ) 10-year 5-year 2-year Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Source: HKMA saff esmaes. Noes: Y,, s he local governmen bond ndex of economy I a me, Y RBM, s he regonal benchmark bond ndex (.e., he smple average governmen bond ndces of all economes excep economy ) of economy I a me and Y, s he domnan exernal facor a me proxed by he US Treasury bond ndex. US 20 In hs model, he ndvdual economy s governmen bond ndces are assumed o be nfluenced by wo facors her respecve regonal proxy and he US. Ths assumpon s suppored by he hgh correlaons beween an economy s bond ndex n he regon (excep he bond ndex of Indonesa and he Phlppnes) and s regonal proxy as well as he US. Whle he specfc seup of he model provdes a mean for measurng he sensves of ndvdual economy s governmen bond ndces o ha of he US relave o he regonal proxy, one should nerpre hs sensvy ndcaor wh cauon and examne he rend of he me-varyng β esmaes (wheher s approachng zero or one) raher han comparng solely he absolue levels of β.
- 14 - As shown n Char 3, he β ndcaors for dfferen maures appear o move n andem for mos of he me. There were several occasons when he ndcaors showed sgns of ncreasng sensves o he regonal benchmark bond ndces (an ndcaon of negraon) as hey approached zero. Snce 2003, he sensvy o regonal nfluence, hough sll domnan, appears o be declnng, as he ndcaors drf away from around o abou 0.3 and n 2006. 21 Char 4. Average Haldane and Hall Sensvy Indcaor ( β ) by Regonal Blocs 2-year bond 5-year bond Four-dragon bloc Asan emergng regon Four-dragon bloc Greaer Chna regon Asan emergng regon Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 10-year bond Four-dragon bloc Greaer Chna regon Source: HKMA saff esmaes. Asan emergng regon Oc-96 Oc-98 Oc-00 Oc-02 Oc-04 Char 4 provdes a closer look of reurn convergence beween regonal blocs. As shown n Char 4, he evoluons of he reurn sensves are very volale for bonds wh longer maures. Smlar o he observaons n Char 3, here are clear sgns of declnng sensves o he regonal nfluence among he regonal blocs for all maures, wh her esmaed sensvy ndcaors ( β ) drfng away from low levels o beween and n 2006. Whle he bond ndces n he four-dragon bloc and he greaer Chna regon appear o be nfluenced more by her US counerpars, hose n he Asan emergng regon are more sensve o he regonal nfluences as her esmaed 21 Usng a smlar approach, Km e al. (2004) show ha he bond markes of he hree accesson EU counres, namely he Czech Republc, Hungary and Poland, are convergng more o ha of he Uned Kngdom han Germany.
- 15 - sensvy ndcaors ( β ) are closer o zero han hose obaned for he oher wo regonal blocs. c. Dynamc conegraon analyss The sandardsed race sascs, whch are he rao beween he race sascs obaned from he Johansen (1988) conegraon esmaon and he correspondng 95% crcal value, are used as a es of he null hypohess of no conegraon. If he rao s conssenly greaer han one, suggess ha he null hypohess of no conegraon can be rejeced. In hs ndcaor, he presence of hs longrun relaonshp s regarded as a sgn of negraon among he governmen bond markes n he regon. On he oher hand, f he sandardsed race sascs are less han one, he null hypohess of no conegraon canno be rejeced. One can also assess he number of conegrang relaonshp (hrough he examnaon of he number of conegrang vecor) dscovered whn he group of bond markes. The more conegrang relaonshps one can fnd, he hgher s he conegraon beween he bond markes n he group. 22 In hs sudy, we adop a 24-monh rollng conegraon esmaon and he sandardsed race sascs are ploed over me n Char 5. 23 22 23 In a sysem of n seres, a condon for complee conegraon s ha here are n-1 conegrang vecors. For Asa as a whole wh en bond ndces, f nne conegrang vecors are found beween hese ndces, hen convergence has occurred and hese bond markes are sad o be compleely negraed. Ideally, a wder wndow (say 36 monhs) s beer o capure he long-run relaonshp n he conegraon measure. However, due o daa avalably, he rollng wndow s fxed a 24 monhs.
- 16 - Char 5. 24-monh Rollng Sandardsed Trace Sascs for Tesng Varous Null Hypoheses 10-year bond 5-year bond 1.4 No conegraon 1.4 1.4 No conegraon 1.4 A mos one conegrang vecor A mos wo conegrang vecors A mos one conegrang vecor A mos wo conegrang vecor Jul-05 Oc-05 Jan-06 Apr-06 Apr-06 May-06 Jun-06 2-year bond 1.4 A mos one conegrang vecor No conegraon A mos wo conegrang vecor 1.4 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Source: HKMA saff esmaes. Char 5 shows ha for he null hypohess of no conegaron, he sandardsed race sascs for bond ndces of 5-year and 10-year maury are conssenly larger han one, whle ha of 2-year maury have fallen below one snce 2006. However, he null hypoheses of more han one conegrang relaonshp (hrough he examnaon of he number of conegrang vecor) are mosly rejeced for Asa as a whole for all maures, as he sandardsed race sascs are less han one. Ths suggess ha here s only a weak conegraon beween he governmen bond markes n he regon. Compared o he bond markes n he European Unon member counres, he Asan bond markes are much less conegraed, suggesng a low degree of negraon n Asa. 24 24 Usng he same dynamc conegraon approach, Km e al. (2004) show ha he number of conegrang vecors from en European Unon member counres bond markes ranges from hree o seven over he sudy perod from January 1999 o Ocober 2003. They conclude ha he en European bond markes form an negraed sysem bu here s lle evdence ha he sysem s ncreasngly convergng.
- 17 - Char 6. 24-monh Rollng Sandardsed Trace Sascs for Tesng he Null Hypohess of No Conegraon by Regonal Blocs Greaer Chna regon 1.8 1.8 1.6 10-year 1.6 1.4 5-year 1.4 2-year May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Four-dragon bloc 1.8 1.6 1.8 1.6 10-year 1.4 1.4 5-year 2-year Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Asan emergng regon 1.8 1.8 1.6 1.6 1.4 5-year 10-year 1.4 Source: HKMA saff esmaes. 2-year Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Char 6 provdes he sandardsed race sascs for he null hypohess of no conegraon among regonal blocs for bonds of dfferen maures. The graphs show ha he bond markes beween members of he same regonal bloc are only occasonally conegraed. Snce June 2005, her sandardsed race sascs have mosly sayed a a level below one. d. Marke cycle synchronsaon The exen of negraon beween dfferen markes can be measured by wheher he marke cycles of dfferen economes are synchronsed or no. As poned ou by Edwards e al. (2003), he consrucon of he cycle synchronsaon ndcaor, he concordance ndex, depends on he proper denfcaon of dfferen phases n he marke cycles. In Char 7, as an example, we show he evoluon of Hong Kong s 10-year bond ndex, wh s bull perods shaded for vsual nspecon usng he mehodology suggesed by Edwards e al. (2003). 25 25 Please refer o he Appendx for he rules of denfyng peaks and roughs.
- 18 - Char 7. Hong Kong 10-year EFN Index and Marke Cycles Reurn Index 120 110 100 90 80 70 60 50 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Noe: Shaded areas represen bull phases. Parwse concordance ndces derved from Equaon (3) of he Appendx over he sample perod for 10-year governmen bonds are presened n Table 6. 26 Table 6. Concordance Indces of Asan Governmen Bond Markes (10-year Maury) The Manland HK TW SG KR PH TH ID MY JP The Manland 1 5 0.73 7 0.76 2 0.72 0.51 0.76 5 HK 1 0 6 4 7 0.72 0.53 0.74 3 TW 1 0.70 3 0.70 0.79 0.59 7 6 SG 1 5 7 0.56 0.76 0.56 0.55 KR 1 6 0.73 0.59 0.76 0.52 PH 1 8 0.50 1 0.51 TH 1 7 0.74 0.57 ID 1 0.50 2 MY 1 0 JP 1 Noes: The concordance ndces of Hong Kong are hghlghed. The bond marke abbrevaons n he able are as follows: HK for Hong Kong, TW for Tawan, SG for Sngapore, KR for Korea, PH for he Phlppnes, ID for Indonesa, MY for Malaysa and JP for Japan. I should be noed ha as he sarng daes of he governmen bond ndces are dfferen (see Table 2), he number of daa sample nvolved n he dervaon of he concordance ndces for each par of economes are no he same. For nsance, he sarng dae n he calculaon of he concordance ndex beween Hong Kong and Tawan bond markes s July 1997. I s January 2002 for Hong Kong and he Manland and March 2004 for Hong Kong and Indonesa. Cauon should be aken when makng comparson of he concordance ndces. Source: HKMA saff esmaes. 26 As he bond marke cycles are que smlar for all maures, hs secon only presens he fndng usng he 10-year governmen bond ndces.
- 19 - The parwse concordance ndces of bond markes are que hgh, averagng and above, wh he excepon of Indonesa averagng a 0.54. Ths mples ha over he sample perods, he bond marke cycles n he regon are algned wh one anoher for over 60% of he me. Usng a wndow of 16 monhs (whch s equvalen o he lengh of one complee marke cycle), he parwse rollng concordance ndces (RCIs) s derved for bond markes and j (based on Equaon 3 n he Appendx). The value of he RCI ranges from zero (perfec msalgnmen of phases) o one (perfec algnmen). An upward (downward) rend n he RCI sgnals ncreased (decreased) bond marke cycle concordance, whch s regarded as a sgn of greaer (less) marke negraon. Plong he RCI over me hus provdes a pcure of how an economy s bond marke cycle concdes wh oher markes. As an llusraon, Char 8 shows he RCIs beween ndvdual economes 27, 28 10-year bond ndces and her respecve regonal ndces. 27 28 As he marke cycles are que smlar for bond ndces of 5-year maury, he char only presens he RCIs usng he 10-year governmen bond ndces. Durng he locaon of peaks and roughs, mulple peaks (roughs) could be denfed bu only he hghes (lowes) of consecuve peaks (roughs) wll be aken as he peak (rough) of he cycle. Hence, for a complee cycle, here s only one peak and one rough.
- 20 - Char 8. RCIs of Asan Governmen 10-year Bond Indces vs. Regonal Bond Proxes Greaer Chna regon Four-dragon bloc and Japan Hong Kong Tawan Hong Kong Tawan The Manland Oc-98 Oc-99 Oc-00 Oc-01 Oc-02 Oc-03 Oc-04 Oc-05 Sngapore Japan Korea Oc-98 Oc-99 Oc-00 Oc-01 Oc-02 Oc-03 Oc-04 Oc-05 Asan emergng regon Malaysa Phlppnes Thaland Indonesa Oc-98 Oc-99 Oc-00 Oc-01 Oc-02 Oc-03 Oc-04 Oc-05 Noes: 1. The ndvdual bond marke s regonal ndex s proxed by he cross-counry average bond ndex of he correspondng maury excludng he bond ndex of ha marke self. 2. I should be noed ha as he local peak or rough s locaed by comparng he bond ndex level a me wh he levels hroughou + 174 days and 174 days (approxmaely egh monhs before and afer me ), he RCIs are calculaed up o 4 November 2005 whch s 174 days before he end of he sample perod. Source: HKMA saff esmaes. The graphs n Char 8 show ha he bond marke cycles are que synchronsed for he Asan regon as a whole. Mos bond markes n he regon experenced a fall n her RCIs beween 2003 and 2004. The RCIs of Korea, Tawan and he Manland managed o pck up afer he drop, whle ha of he Asan emergng markes fell back o beween 0.5 and 0.7 followng a bref mprovemen. Also, noable declnes n bond marke cycle synchronsaon are observed n Hong Kong, Sngapore and Japan. Ther RCIs have dropped o less han 0.5 as a Ocober 2005.
- 21 - Char 9. Average RCIs of 10-year Bond Indces of Regonal Blocs Greaer Chna regon Four-dragon bloc Asan emergng regon Oc-98 Oc-00 Oc-02 Oc-04 Noe: As he sarng daes of bond ndces are dfferen, he number of RCI seres beng averaged wll ncrease over me. Source: HKMA saff esmaes. Char 9 akes a closer look on he average rollng RCIs for he bond markes whn he hree regonal blocs respecvely. I shows ha he synchronsaon of he bond marke cycles whn he hree regonal blocs vares que a lo before 2004, wh he RCIs swngng from perfec synchronsaon (RCI of one) o less han n he case of he Asan emergng regon. Ye her RCIs have sablsed a beween and levels snce lae 2004, meanng ha abou 60 o 80% of he me he bond marke cycles n members of hese regonal blocs were algned wh oher members whn he same bloc. Overall, Chars 8 and 9 sugges ha he bond marke cycles n he Asan emergng regon are que synchronsed boh wh he regonal cycle and among hemselves, compared o ha of he four-dragon bloc and he greaer Chna regon.
- 22 - e. Bea convergence of bond reurn The bea coeffcen n Equaon (4) n he Appendx s derved by esmang he GARCH model usng a rollng wndow of 18 monhs. For complee marke negraon, he esmaed bea should be equal o one,.e., bond reurns of ndvdual economy ( Δ ) should reac exclusvely o common news, whch s represened by he Y c, reurn of he US Treasury bond ( Δ Y US, ). A rsng bea suggess an ncreasng rend of marke negraon. 29 Char 10 depcs he evoluon of he esmaed beas. Char 10. Unweghed 18-monh Rollng Bea Esmaes (Mean equaon: Δ = α + β ΔY + ) Y c, c, c, US, ε c, Rollng 18-monh bea 0.3 5-year 10-year 0.3 0.1 2-year 0.1-0.1 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Noe: ΔY c, denoes he bond reurn of counry c a me and Δ Y US, s he bond reurn of he US Treasury of correspondng maury a me. Source: HKMA saff esmaes. For Asa as a whole, he esmaed beas n Char 10 sugges a slowly rsng rend of common news nfluence from he US snce 1999. Noneheless, hey reman a a low level of 0.3 or below for all maures. Table 7 hghlghs he unweghed average rollng beas for ndvdual economes. -0.1 29 I should be noed ha he esmaon resuls of he economerc specfcaon n Equaon (4) n he Appendx may dffer dependng on he selecon of he mos approprae benchmark bond o reflec he common news effec. In many sudes, he US Treasury bond s a popular choce n represenng he common news facor.
- 23 - Table 7. Average Bea Esmaes Economy 2-year bond 5-year bond 10-year bond Hong Kong 0.54 0.55 2 The Manland NA -1 0.16 Tawan 0.12 0.19 0.14 Korea 0.11 0.13 0.13 Sngapore 0 0 0.35 Japan 0.14 0.16 0.18 Malaysa 0 1 0 Thaland 0.11 0.18 0.11 Indonesa 6 9-3 The Phlppnes 3 0-4 Source: HKMA saff esmaes. Table 7 shows ha he bond reurns n Hong Kong are he mos sensve and posvely relaed o he US Treasury bond reurns parly because of he Lnked Exchange Rae sysem of he Hong Kong dollar. Compared o economes n he Asan emergng regon, he bond reurns n he res of he four-dragon economes and Japan are relavely more sensve o he US bond reurns. Ths resul may sugges ha he local or dosyncrac facors concernng cred and lqudy rsks of he Asan emergng economes have a larger mpac on domesc bond reurns n hese economes han he global facor. 30 f. Dynamc condonal correlaon (DCC) A GARCH(1,1)-DCC model usng a wo-sep esmaon procedure as oulned n he Appendx s esmaed wh weekly bond reurn seres. The exen of bond marke negraon s gven by he condonal correlaon esmaed from hs model. Table 8 hghlghs he average parwse dynamc condonal correlaon beween he reurns of ndvdual markes 10-year bond over he sudy perod. 31 30 31 Usng he German bond yeld as he benchmark, ECB (2005) shows ha he bea esmaes for fve EMU counres converge owards one afer 2001. The DCC esmaon resuls are smlar wh he reurns of he 5-year bond. Ths secon only presens he DCC esmaon wh he reurns of he 10-year bond.
- 24 - Table 8. Average Condonal Correlaons The Manland HK TW SG KR ID MY TH PH JP US JPMGBI The Manland 1 0.58 0.32 8 3-8 2 0.32 7 6 0 0.33 HK 1 0.33 3 7-0.12 0.15 9-1 6 0.58 0.36 TW 1 0 0.32 1 0.18 0.33 0.12 9 2 0.13 SG 1 1-2 0.12 0.34 0.12 8 0.38 5 KR 1 0.10 0.14 0.32 0.12 0.36 0.12 0 ID 1 0.12 0.16 2-2 -4-1 MY 1 0.18 0.14 0.13 9 0.15 TH 1 0.17 9 0.18 1 PH 1 0.10-8 0.11 JP 1 0.17 0.15 US 1 4 JPMGBI 1 Noes: The DCCs of Hong Kong are hghlghed. The bond marke abbrevaons n he able are as follows: HK for Hong Kong, TW for Tawan, SG for Sngapore, KR for Korea, PH for he Phlppnes, ID for Indonesa, MY for Malaysa, JP for Japan and JPMGBI for JP Morgan EMBIG Asa Soveregn reurn. I should be noed ha as he sarng daes of he governmen bond reurn seres are dfferen (see Table 2), he number of reurn seres nvolved n he esmaon of he DCCs wll ncrease as me passes. For nsance, beween March 1996 and March 1998, here are sx reurn seres n he DCC esmaon. The number of reurn seres ncreases o nne beween Aprl 1998 and Augus 1998, o en beween Sepember 1998 and July 2001, o 11 beween Augus 2001 and Sepember 2003, o 12 from Ocober 2003 onwards. Cauon should be aken when makng comparson of he DCCs. Source: HKMA saff esmaes. The able shows ha, n general, he reurn correlaons are no very hgh beween he bond markes n he regon. Indvdual bond markes DCCs wh he regonal benchmark reurn proxy (he JP Morgan EMBIG Asa Soveregn reurn) range from -1 o 0.36. Whle mos of he parwse average DCCs are posve, he DCCs beween he bond reurns of Indonesa and ha of he Manland, Hong Kong, Sngapore and Japan are negave. Char 11 depcs he average condonal correlaons beween he reurns of ndvdual markes 10-year bond and hose of he oher bond markes. 0.5 0.3 Char 11. DCCs of Asan Governmen Bond Markes Reurns Greaer Chna regon Four-dragon bloc and Japan 0.5 0.5 Sngapore Korea Tawan 0.3 0.3 0.5 0.3 0.1 Manland Hong Kong 0.1 0.1 Japan Tawan Hong Kong 0.1 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
- 25 - Asan emergng regon 0.5 0.5 0.3 Thaland 0.3 Malaysa 0.1 Phlppnes Indonesa Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 0.1 Source: HKMA saff esmaes. The graphs n Char 11 ndcae a farly low level of average correlaon of abou 0.1 o 0.3 n 2006 beween he bond reurns of ndvdual markes and hose of he oher bond markes. The DCCs of Indonesa, he Phlppnes and Malaysa are among he lowes n he regon. Compared o he low reurn correlaon n Asa, a much larger degree of reurn correlaon s found n Europe. 32 Char 12. Average DCCs of Regonal Blocs 0.7 0.7 0.5 Greaer Chna regon 0.5 0.3 Four-dragon bloc 0.3 0.1 Asan emergng regon 0.1 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Noe: As he sarng daes of bond reurn seres are dfferen, he number of DCC seres beng averaged wll ncrease over me. Source: HKMA saff esmaes. 32 In her nvesgaon of bond reurn correlaons beween members of he EMU, Cappello e al. (2003) show ha her average DCC flucuaes beween 0.7 and 0.9 before 1999 and becomes almos perfec correlaon followng he nroducon of he Euro n January 1999.
- 26 - Char 12 focuses on he paern of he average DCCs whn he hree regonal blocs. The bond markes n he greaer Chna regon and he four-dragon bloc are relavely more correlaed wh each oher respecvely, compared o ha n he Asan emergng regon. Noneheless, he degree of correlaon s no hgh as he average correlaon s jus above n 2006. V. SUMMARY AND DISCUSSION Table 9 provdes a summary on he curren saus of bond marke negraon by he varous ndcaors. Table 9. Summary of Indcaon of Curren Bond Marke Inegraon n Asa Mehod a. Cross-counry dsperson of bond reurn b. Haldane and Hall (1991) Kalman fler mehod c. Dynamc conegraon analyss d. Marke cycle synchronsaon e. Bea convergence of bond reurn f. Dynamc condonal correlaon (DCC) model Indcaon of marke negraon Lower reurn dsperson and smaller reurn dfferenal mply hgher reurn convergence Unweghed average β moves owards zero ndcaes an ncreasng sensvy o regonal nfluence Sandardsed race sascs conssenly greaer han one and ncreasng number of conegraon relaonshps An upward rend n he RCI sgnals ncreased marke concordance The larger he esmaed condonal bea owards one, he greaer he nfluence from common news facor The hgher he me-varyng correlaon, he larger he comovemen beween governmen bond reurn Curren saus of marke negraon Reurn dspersons are fallng, bu here are sgns ha he dspersons are rendng upwards laely Some progress durng 1990s bu no mprovemen snce 2003 A mos only one conegraon relaonshp can be found, ndcang weak conegraon Bond marke cycles n he Asan emergng regon as well as oher regonal blocs seem o be as synchronsed wh he regonal cycles and beween hemselves Small esmaed bea values bu hey are mprovng Low level of condonal correlaon beween 0.1 and 0.3
- 27 - Gven he dfferen focus of each ndcaor, he pcure ha emerges from he emprcal resuls s no compleely unform. For nsance, whle he condonal correlaon beween he bond reurns of he Asan emergng regon s very low a abou 0.3 or less, he phases of her bond marke cycles are farly algned a abou. On he oher hand, boh he Haldane and Hall sensvy ndcaor and he bea convergence ndcaor pon o an ncreasng sensvy of Asan bond marke reurns o ha n he US, suggesng a declne n he regonal bond marke negraon. For Asa as a whole, mos ndcaors pon o a weak negraon and he suaon has no mproved (or very lle progress has been made) snce 2003. Whle he reurn dspersons have declned snce he Asan fnancal crss, here are sgns ha hey are now rendng upwards. The Haldane and Hall sensvy ndcaors have drfed away from abou n 2002-2003 and rsen o abou n 2006, suggesng an ncreased nfluence from he US Treasury bond marke. In parcular, bond reurns of he greaer Chna economes and he four-dragon economes are more sensve o her US counerpars han hose of he Asan emergng markes. The bea convergence measures also ndcae an ncreased n he sensvy o he US Treasury bond reurns. The resuls from he dynamc conegraon analyss only ndcae weak conegraon among he governmen bond markes. The condonal correlaons from he DCC measures show ha he bond markes are very weakly correlaed. The only excepon s from he synchronsaon measure, whch shows ha he bond marke cycles n he regon are algned over 60% of he me durng he sudy perod. However, s also noed ha he bond marke cycles n Hong Kong, Sngapore and Japan are becomng less synchronsed wh he regon snce lae 2003. Compared o her Asan counerpars, he European bond markes are much more negraed, a resul suggesed by he fall of he yeld spread dspersons o zero snce 2001, a srong degree of bea convergence o he German bond yeld and her large reurn correlaons of 0.9. Compared o he equy marke negraon sudy by Yu e al. (2007) whch covered he same economes n he Asan regon, he bond marke negraon s relavely laggng behnd. Despe he fac ha he wo markes only record mnmal or even regressve progresses n her respecve negraon process snce 2003, he varous ndcaors sll sugges a larger degree of negraon n he equy markes. For nsance, whle he dynamc conegraon measure ndcaes boh markes are weakly conegraed, measures based on he dynamc correlaon, he Haldane and Hall sensvy ndcaor and he cycle synchronsaon show he hgher degree of equy marke negraon. Ths resul may sugges ha he bond markes n he regon may have dfferen sages of developmen and her nerdependences are n general weak when compared o hose of he equy markes n he regon. In summary, he emprcal resuls from hese ndcaors provde a general pcure regardng he rend of bond marke negraon n Asa. The evdence presened s broadly n lne wh he common percepon ha here s very lmed progress of bond
- 28 - marke negraon akng place n he regon. The pcure s also suppored by oher alernave measures. For nsance, usng he share of cross-border bond nvesmen n her bond porfolos as one of he measures of capal marke negraon, Chu e al. (2006) noe ha Asan economes hold a relavely smaller share 3.6% on average n 2004, compared o 68.8% n Europe. The demand for deb secures from he US and Europe remans srong and her share n Asan economes bond porfolo amouns o 68.2% on average n 2004. The apparen lack of progress n bond marke negraon may be due o he local or dosyncrac facors such as cred or lqudy rsks n some Asan economes. I may also be he case ha many local bond markes n he regon are sll n her early developmen sage and wh low lqudy due o nacve radng. Whle nernaonal effor o pursue polcy coordnaon s desrable for promong a hgher degree of bond marke negraon, s also essenal for cenral banks n he Asan regon o focus on he developmen of her domesc bond markes. Insuonal and regulaory reforms, such as mprovng marke nfrasrucure, nroducng new producs, promong real nvesmen and aracng offshore nvesors, openng local currency bond marke o supranaonal and foregn fnancal nsuons, wll help speed up he developmen of domesc bond markes, and hus provdng a more favourable plaform for greaer bond marke negraon.
- 29 - REFERENCES Adam, K., T. Jappell, A. Menchn, M. Padula and M. Pagano (2002): Analyse, Compare, and Apply Alernave Indcaors and Monorng Mehodologes o Measure he Evoluon of Capal Marke Inegraon n he European Unon, Repor commssoned by he European Commsson. Asan Developmen Bank (2005): Asa Bond Monor, November. Baele, L., A. Ferrando, P. Hordahl, E. Krylova and C. Monne (2004): Measurng Fnancal Inegraon n he Euro Area, European Cenral Bank Occasonal Paper 14. Cappello, L., R. F. Engle and K. Sheppard (2003): Asymmerc Dynamcs n he Correlaons of Global Equy and Bond Reurns, European Cenral Bank Workng Paper 204. Chu, C., Y. K. Mo, G. Wong and P. Lm (2006): Fnancal Inegraon n Asa, Hong Kong Moneary Auhory Quarerly Bullen 49. Danareksa Research Insue (2004): Toward a Regonal Fnancal Archecure for Eas Asa, Repor commssoned by ASEAN Secreara. De Brouwer, G. and J. Corbe (2005): A New Fnancal Marke Srucure For Eas Asa: How o Promoe Regonal Fnancal Marke Inegraon, Paper prepared for presenaon a he OECD/ADBI 7h Round Table on Capal Marke Reform n Asa, 27-28 Ocober 2005. Edwards, S., J. G. Bscarr and F. P. de Graca (2003): Sock Marke Cycles, Fnancal Lberalsaon and Volaly, Journal of Inernaonal Money and Fnance 22, 925-955. Engle, R. F. (2002): Dynamc Condonal Correlaon: A Smple Class of Mulvarae Generalzed Auoregressve Condonal Heeroskedascy Models, Journal of Busness and Economc Sascs 20(3), 339-350. Engle, R. F. and K. Sheppard (2001): Theorecal and Emprcal Properes of Dynamc Condonal Correlaon Mulvarae GARCH, NBER Workng Paper 8554. European Cenral Bank (2005): Indcaors of Fnancal Inegraon n he Euro Area, Sepember. European Commsson (2005) Fnancal Inegraon Monor. Haldane A. G. and S. G. Hall (1991): Serlng s Relaonshp wh he Dollar and he Deuschemark: 1976-89, The Economc Journal 101(406), 436-443. Hardng, D. and A. R. Pagan (2000): Knowng he Cycle, n Backhouse, R.E. and Salan, A. (Eds.) Macro-economcs and he Real World Volume 1: Economerc Technques and Macroeconomcs, Oxford Unversy Press, Oxford, 23-42.
- 30 - (2002): Dssecng he Cycle: A Mehodologcal Invesgaon, Journal of Moneary Economcs 49(2) 365-381. Johansen, S. (1988): Sascal analyss of Conegraon Vecors, Journal of Economc Dynamcs and Conrol 12, 251-254. Km, S. J., B. M. Lucey and E. Wu (2004): Dynamcs of Bond Marke Inegraon beween Exsng and Accesson EU Counres, Insue for Inernaonal Inegraon Sudes Dscusson Paper 25. Mannng, N. (2002): Common Trends and Convergence? Souh Eas Asan Equy Markes, 1988 1999, Journal of Inernaonal Money and Fnance 21, 183-202. McCauley, R., S. S. Fung and B. Gadanecz (2002): Inegrang he Fnances of Eas Asa, Bank for Inernaonal Selemens Quarerly Revew (December). Pagan, A. R. and K. A. Sossounov (2003): A Smple Framework for Analysng Bull and Bear Markes, Journal of Appled Economercs 18(1), 23-46. Park, Y. C. (2004): Regonal Fnancal Inegraon n Eas Asa: Challenges and Prospecs, Paper prepared for presenaon a he Uned Naons Conference on Regonal Fnancal Arrangemens. Park, D. and Y. C. Park (2005): Toward Developng Regonal Bond Markes n Eas Asa, Asan Economc Papers 3(2), 183-209. Pascual, A. G. (2003): Assessng European Sock Markes (Co)negraon, Economcs Leers 78, 197-203. Ravn, M. O. and H. Uhlg (2002): On Adjusng he Hodrck-Presco Fler for he Frequency of Observaons, Revew of Economcs and Sascs 84, 371-375. Rennger, T. and Z. Walko (2005): The Inegraon of he Czech, Hungaran and Polsh Bond Markes wh he Euro Area Bond Marke, Paper prepared for presenaon a he ONB, ECB and CFS Conference on Fnancal Developmen, Inegraon and Sably n Cenral, Easern and Souh-Easern Europe, November. Serles, A. and M. Kng (1997): Common Sochasc Trends and Convergence of European Unon sock Markes, The Mancheser School 65(1), 44-57. Shller, R. J. (1979): The Volaly of Long-erm Ineres Raes and Expecaons Models of he Term Srucure, Journal of Polcal Economy 87(6), 1190-1219. Wong, A. S. K. and P. J. G. Vlaar (2003): Modellng Tme-varyng Correlaons of Fnancal Markes, De Nederlandsche Bank NV Research Memorandum 739/0319. Yu, Ip-wng, L. Fung and C. S. Tam (2007): Assessng Fnancal Marke Inegraon n Asa Equy Markes, Hong Kong Moneary Auhory Workng Paper 04/2007.
- 31 - Mehodology and Inerpreaon: Indcaors of Bond Marke Inegraon Appendx Ths Appendx provdes he mehodologes of consrucng he ndcaors for assessng bond marke negraon n Asa and her nerpreaon. All negraon ndcaors are derved based on he bond reurns of ndvdual economes expressed n erms of he US dollar. The bond reurns are approxmaed by he holdng perod reurn as dscussed n Shller (1979). 33 Once he bond reurn seres (n local currency) are derved, hey are convered no US dollar reurn seres by dvdng he local currency bond reurn seres by he percenage change n he local currency per US dollar exchange rae of he respecve economes. a. Cross-counry bond reurn dsperson The European Cenral Bank (ECB) uses he dsperson of governmen bond yeld spreads as one of her ndcaors o assess bond marke negraon n he Euro area. 34 Gven comparable maures and oher relevan feaures, yeld spreads for governmen bonds can provde a drec measure of yeld convergence. The hgher he degree of yeld convergence, he lower he dsperson s. 35 In hs sudy, we modfyng he ECB (2005) approach and calculae he he cross-counry bond reurn dsperson ndcaor. Ths ndcaor s derved frs by akng he sandard devaon of he governmen bond reurn seres of varous economes n he regon. Once a me seres of sandard devaons s obaned, s flered usng he Hodrck-Presco smoohng echnque o reveal he long-erm rend componen of he seres. In addon, o assess he bond marke negraon process among regonal blocs, a 12-monh movng average of he cross-marke maxmum-mnmum reurn dfferenal s consruced. For boh measures, he smaller he reurn dsperson or dfferenal beween bond markes s, he greaer her reurn convergence s. b. Haldane and Hall (1991) Kalman fler mehod The noon of convergence or negraon s ha he dfference beween wo (or more) seres should become arbrarly small or converge o some consan c as me elapses, such ha lm E( X Y ) = 0 or c, where X and Y are he wo seres. k + k + k The convergence process may be gradual and on-gong over me. Under hs crcumsance, we need an ndcaor whch would allow for he deecon of such process 33 34 35 See Foonoe 12 for he formula of holdng perod reurn. See ECB (2005). I s noed ha he perceved cred rsk or lqudy of he relevan governmen bonds could be dfferen and hs may affec he oucome of he ndcaor and s nerpreaon. See Foonoe 18 for deals.
- 32 - from a lower o a hgher negraon level over me. Ths ndcaor wll be useful n descrbng boh he degree and mng of srucural change durng he negraon process. The Kalman fler approach suggesed by Haldane and Hall (1991) s used o measure he me-varyng convergence dynamc. The mehod esmaes a smple equaon va Kalman fler esmaon wh he sgnal equaon as, ε ~ N(0, ) (1) Y RBM, Y, = α, + β, ( YRBM, YUS, ) + ε,, V and he sae equaons as α, α, 1 + ξ, ξ ~ N(0, U ) = β = β + μ, μ ~ N(0, ) (2),, 1 W Y, where, s he local governmen bond ndex of economy a me, Y RBM, s he regonal benchmark bond ndex (.e., he cross-counry smple average governmen bond ndex of all economes excep economy ) of economy a me and Y, s he domnan exernal marke a me proxed by he US Treasury bond ndex. We oban he esmaed parameer β over me va Kalman Fler. From Equaon (1), s easy o show ha f Y and Y RBM converge (he governmen bond ndex of economy converges o he domnan regonal benchmark bond ndex), we would expec β o approach zero. Conversely, f Y and Y US converge (he governmen bond ndex of economy converges o he US Treasury bond ndex nsead of he regonal benchmark ndex), we would expec β o approach one. 36 Under hs measure, a endency for β movng owards zero ndcaes an ncreasng sensvy of ndvdual bond ndex o he nfluence of he regonal bond ndex, whch can be nerpreed as a sgn of bond marke negraon. 37 US 36 37 By re-arrangng Equaon (1), we oban he followng equaon: ( 1 β = (A1), ) Y RBM, + β, YUS, α, ε, Y, I can be seen from Equaon (A1) ha when β approaches zero, he movemen n Y, would be ncreasngly nfluenced by ha n Y RBM,, suggesng ha he wo seres are convergng. On he oher hand, when β approaches one, he nfluence from Y RBM, s reducng whle ha from Y US, s ncreasng, whch suggess Y, and Y US, are convergng. The suaon when β s greaer han one or becomes negave suggess ha Y, s dvergng away from Y RBM, and Y US,. One cavea of he Haldane and Hall approach s ha he concluson of wheher he bond markes are convergng or dvergng may well dffer dependng on he choces of he domnan regonal marke and domnan exernal marke.
- 33 - c. Dynamc conegraon analyss If he fnancal markes of a group of economes are negraed and nerdependen, here are lkely o have conegraon relaonshp beween fnancal varables of hese economes. To examne he me-varyng naure of convergence and conegraon, he rollng conegraon procedure smlar o Pascual (2003) s used wh a consan sample sze as he esmaon rolls over o he nex perod. Usng he Johansen (1988) conegraon echnque, he race sasc obaned from he rollng esmaon, whch s a es of he general queson of wheher here exss one or more conegrang vecors, can be used o es he conegraon of he governmen bond markes over me. The race sascs can be ploed over me o examne he me varyng naure of marke negraon. If markes are conegrang (.e., convergng), he sandardsed race sascs, whch are he rao beween he race sascs and he correspondng 95% crcal values, should be conssenly greaer han one, suggesng ha he null hypohess of no conegraon can be rejeced. If markes are dvergng or no even n any sense of conegraed, he sandardsed race sascs wll be less han one. The more conegrang vecors one can dscover from a group of fnancal varables, he greaer her conegraon s. d. Synchronsaon of fnancal marke cycle approach Anoher ndcaon of marke negraon s o look no wheher marke cycles algn n me across he regon,.e., we ry o denfy wheher, a a gven momen n me, he fnancal markes n he regon are n he same phase of he fnancal marke cycle. If he fnancal marke cycles n he regon are more or less synchronsed, may provde anoher ndcaon (or evdence) of fnancal marke negraon. The frs sep n he analyss of he cycle phases s he deermnaon of he urnng pons he peaks and he roughs ha sgnal he change n he rend of he marke from bearsh o bullsh and vce versa. Based on he bond ndex of ndvdual economy, we defne a rsng bond ndex as he bull phase of he bond marke cycle, whle a fallng bond ndex as he bear phase of he cycle. Followng he rules from Edwards e al. (2003) for locang he urnng pons, we denfy he peaks and he roughs of bond marke cycles as follows: 1. local peak (rough) s locaed by comparng he bond ndex level a me wh bond ndex levels hroughou + 174 days and 174 days (approxmaely egh monhs before and afer me ) 38 38 Edwards e al. (2003) noe ha he resuls of locang peaks and roughs may be sensve o he choce of he wndow wdh. In hs sudy, as n Edwards e al., a oal cycle lengh of 16 monhs s chosen, as suggesed by Pagan and Sossounov (2003).
- 34-2. Once he peaks and roughs are denfed, censorng rules are appled o ensure ha we do no denfy spurous phases: () urnng pons whn egh monhs of he begnnng / end of he seres are elmnaed () peak or rough nex o he endpon of he seres s elmnaed f s lower / hgher han he endpon () cycles of less han 16 monhs of duraon are elmnaed (v) phases of less han four monhs are elmnaed (v) enforced alernaon so ha a peak s always followed by a rough and vce versa (v) f consecuve peaks (roughs) occur, ake he hghes (lowes) one 3. For perods whch are denfed as bull phase (S ), hen S = 1, and hose denfed as bear phase (B ), hen B = 1. A rollng concordance ndex (RCI), usng a wndow of wdh 16 monhs (whch s equvalen o he lengh of one complee marke cycle), s consruced for bond markes and j, as follows: 39 350 1 RCI j = [, τ S j, τ + B, τ B j, τ ] 350 τ = 1 S (3) The value of he concordance ndex ranges from zero (perfec msalgnmen of phases) o one (perfec algnmen). 40 An upward (downward) rend n he RCI sgnals ncreasng (decreasng) marke concordance, mplyng greaer (less) marke negraon. e. Bea convergence of bond yeld Anoher ndcaor also covered n ECB (2005) s he bea convergence ndcaor. If bond markes are fully negraed and counry-specfc cred rsks are absen, bond yelds should only reac o news common o all markes. Tha s, changes n he bond yelds of ndvdual economes should reac exclusvely o common news, whch s refleced n a change of he benchmark governmen bond yeld. 41 We modfy he ECB approach and use bond reurns nsead of changes n bond yeld. To separae common from local nfluences, he followng regresson model s specfed: Δ (4) Y c, = α c, + β c, ΔYUS, + ε c, As we have demonsraed n Table 4 n he man ex, he esmaon of Equaon (4) s plagued wh ARCH effec. Thus, Equaon (4) s specfed under a GARCH(1,1) 39 40 41 A rollng wndow wdh of 16 monhs s used as hs lengh represens one complee cycle. The concordance ndex s used n Hardng and Pagan (2000, 2002). See also Rennger and Walko (2005).
- 35 - specfcaon n he varance erms. Followng ECB (2005), he condonal bea s derved by esmang he GARCH model usng a rollng wndow of 18 monhs (abou 393 days). For complee marke negraon, he condonal bea should be equal o 1,.e., he bond marke reurn of ndvdual economes ( Δ ) should reac exclusvely o common news, Y c, whch s refleced n he reurn of he US Treasury bond ( Δ yelds) wh he same maury. Y US,, or oher benchmark α c, denoes a counry-specfc me-varyng nercep. f. Correlaon usng dynamc condonal correlaon (DCC) model Smple (or rollng) correlaon analyss s among he smples mehod for examnng he co-movemen of fnancal markes. Bascally, hgher correlaon beween markes mples hgher co-movemen and greaer negraon beween he markes. The DCC model, proposed by Engle and Sheppard (2001) and Engle (2002), s a new class of mulvarae model whch s parcularly well sued o examne correlaon dynamcs among asses. The DCC approach has he flexbly of unvarae GARCH bu whou he complexy of general mulvarae GARCH. As he parameers o be esmaed n he correlaon process are ndependen of he number of seres o be correlaed, a large number of seres can be consdered n a sngle esmaon. Furhermore, Wong and Vlaar (2003) show ha he DCC model ouperforms oher alernaves n modellng me-varyng correlaons. To measure bond marke correlaons, a wo-sep esmaon procedure of he DCC model s used. Unvarae GARCH models are frs esmaed for each bond marke reurn seres. The sandardsed resduals from he frs sep are hen used o esmae he dynamc condonal correlaons beween bond marke reurns. Specfcally, le z, and z j, be he sandardsed resduals of bond marke reurns of economy and j a me respecvely, j. The GARCH process, as suggesed n Engle (2002), s: and q ρ j, = ρ j + α( z, 1 j j, = q q j,, q jj, 1z j, 1 ρ j ) + β ( qj, ρ ) (5) (6) where q j s he off-dagonal elemens of he varance-covarance marx, ρ j s he uncondonal expecaon of he cross produc z, z j, and ρ j, s he condonal correlaon beween he bond marke reurns of economy and j a me. 42 42 See Engle (2002) for a dealed descrpon of he smple DCC model and he esmaon procedure.