Testing the efficiency of the sovereign debt market using an asymmetrical volatility test

We test the efficiency of the financial market using the daily prices of the US and German sovereign debts between July 1, 2002 and December 31, 2011. This allowed us to test the efficiency during the pre-crisis, financial and sovereign debt crises periods. We extend the variance bound test of Fakhr...

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Bibliographic Details
Published in:Journal of Management and Training for Industries 2016-10, Vol.3 (2), p.1-15
Main Authors: Fakhry, Bachar, Richter, Christian
Format: Article
Language:English
Subjects:
Bonds
Debts, External
Economics
Efficient market theory
Eurozone
Financial crises
Hypotheses
Prices
Rationality
Securities markets
Sovereign debt
Stochastic models
Stock exchanges
Volatility
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Summary:We test the efficiency of the financial market using the daily prices of the US and German sovereign debts between July 1, 2002 and December 31, 2011. This allowed us to test the efficiency during the pre-crisis, financial and sovereign debt crises periods. We extend the variance bound test of Fakhry & Richter (2015) using a GJR-GARCH model. This hints at our contribution, i.e., the inclusion of the asymmetrical effect in the variance bound test. Our tests produced mixed results, pointing at the markets being too volatile to be efficient. Interestingly, the addition of the asymmetrical effect led to a reduction in the EMH test statistics based on the results from Fakhry & Richter (2015) and hence may have had an impact on the efficiency of the market. Conversely, this is more appropriate to speak of bounded rationality than irrationality. A key conclusion of the paper is it hints at the use of a switching GARCH model as an alternative to the GJR-GARCH. Therefore, a prospective future research could be the use of a switching GARCH model to analyse the different impact of high and low volatility regimes on market. Given our key conclusions, another prospective is the use of sovereign debt indices instead of the issued sovereign debts.
ISSN:2188-8728
2188-2274
DOI:10.12792/JMTI.3.2.1