Discussion Paper Series 2020-E-1

The Integration of Countries' Sovereign Bond Markets: An Empirical Illustration of a Global Financial Cycle

Kei-Ichiro Inaba

This article analyzes the developments and determinants of the country-specific dependence of sovereign bond returns on global factors for 41 advanced and emerging countries over the last decade. The dependence was cyclical and substantial: the average for the sample countries and period is around 56 percent. This is consistent with a global financial cycle hypothesis stressing the dominant role played by global factors in the synchronization of asset price changes across countries. The dependence was smaller for emerging countries than for advanced ones. Differences in the dependence among countries and over time were attributable to country-fixed effects and time-varying factors. These factors include the size and openness of domestic bond market, the variability of foreign exchange rates, the impact of macro-economic policies, and the indebtedness of the national finance. One policy implication of the hypothesis is examined, namely, the dilemma between international capital mobility and monetary policy effect.

Keywords: Sovereign bonds; Market integration; Global financial cycle; Monetary policy; Capital control

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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