Modelling asymmetric sovereign bond yield volatility with univariate GARCH models: Evidence from India

Abstract

AbstractDoes Indian sovereign yield volatility reflect economic fundamentals, or whether it is a self-generated force flowing through markets with little connection to such fundamentals? To answer the question, this research explores the volatility dynamics and measures the persistence of shocks to the sovereign bond yield volatility in India from 1 January 2016, to 18 May 2022, using a family of GARCH models. The empirical results indicate the high volatility persistence across the maturity spectrum in the sample period. However, upon decomposing the markets into bull and bear phases, our results support the existence of weak volatility persistence and rapid mean reversion in the bear market. This shows that the economic response policies implemented by the government during the pandemic, including fiscal measures, have a restraining effect on sovereign yield volatility. For a positive γ, the results suggest the possibility of a “leverage effect” that is markedly different from that frequently seen in stock markets. Results further indicate that the fluctuations in Indian sovereign yields cannot be dissociated from inflation and money market volatility. Our findings herein provide valuable information and implications for policymakers and financial investors worldwide.

Keywords

• sovereign bond yield
• volatility
• leverage
• symmetric GARCH
• COVID-19
• mean reversion