How might sovereign bond yields in Asia Pacific react to US monetary normalisation under turbulent market conditions?

This paper examines the potential impact of US monetary normalisation on sovereign bond yields in Asia Pacific. We apply the quantile vector autoregressive model with principal component analysis to the assessment of tail risk of sovereign debt, which may not be detectable using traditional OLS-base...

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Bibliographic Details
Published in:Journal of applied statistics 2019-08, Vol.46 (11), p.2030-2055
Main Authors: Fong, Tom, Hui, Ceara, Wong, Alfred Y.-T.
Format: Article
Language:English
Subjects:
Autoregressive models
Economic conditions
Economic models
Empirical analysis
Impact analysis
impulse response function
principal components
Principal components analysis
quantile regression
Sovereign credit risk
Sovereign debt
Statistical methods
tail risk
value-at-risk
vector autoregression
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Summary:This paper examines the potential impact of US monetary normalisation on sovereign bond yields in Asia Pacific. We apply the quantile vector autoregressive model with principal component analysis to the assessment of tail risk of sovereign debt, which may not be detectable using traditional OLS-based analysis. Our empirical evidence suggests that US Treasury bond yields can have a significant impact on sovereign bond yields in the region, an important channel through which monetary normalisation by the Fed can affect Asia-Pacific economies. Increases in sovereign bond yields will not only compromise the ability of the sovereigns in the region to service their debt but also translate into higher costs of borrowing for the rest of economy. The results show how much the outsized impact could potentially be if US monetary normalisation somehow turns out to be much more disorderly than expected.
ISSN:0266-4763
1360-0532
DOI:10.1080/02664763.2019.1579305