An empirical illustration of the integration of sovereign bond markets

Abstract

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