Indian Journal of Finance

Open Access Open Access  Restricted Access Subscription Access

Integration of Bond Markets and Portfolio Diversification : Evidence from the 2008 Global Financial Crisis


Affiliations
1 Assistant Professor, Institute of Management, Nirma University, Sarkhej - Gandhinagar Highway, Gota, Ahmedabad - 382 481, Gujarat, India
2 Assistant Professor (Corresponding Author), MBA Department, Naran Lala School of Industrial Management & Computer Science, Navsari - 396 445, Gujarat, India
3 Assistant Professor, S. V. Institute of Management, Kadi Sarva Vishwavidyalaya, S. V. Campus, Behind Railway Station, Kadi - 382 715, Gujarat, India
4 Assistant Professor, St. Kabir Institute of Professional Studies, Nr. SAL Hospital, Off Drive-in Road, Ahmedabad - 380 054, Gujarat, India

   Subscribe/Renew Journal


Purpose : This study aimed to examine the integration between the bond markets of the MSCI Emerging Markets and the USA concerning the 2008 financial crisis.

Methodology : Granger causality and correlation tests were used to assess the short-term integration of the bond markets. The long-term integration was examined using the Johansen co-integration test and VAR analysis.

Findings : Post-crisis, bond markets became more correlated with each other. Due to a lack of market integration in both periods, different portfolio combinations offered the chance for portfolio diversity. The MSCI Emerging Asian markets and US market integration increased with the global financial crisis of 2008. The results of the VAR analysis and impulse response analysis found that innovations in the markets of the USA and China affected the Indian market the most; whereas, the rest of the market had a nominal impact.

Practical Implications : The study has practical implications in the sense that based on the integration, investors might diversify their holdings to achieve a better risk-return balance. The investors can design their investment portfolio accordingly to have an optimal portfolio.

Originality : This study focused on building portfolio diversification with fixed-income securities.


Keywords

Bond Markets, VAR Analysis, MSCI Emerging Asian Markets, Financial Crisis, Portfolio Diversification Opportunity.

JEL Classification Codes : F15, F21, G11, G15

Paper Submission Date : September 15, 2022 ; Paper sent back for Revision : January 15, 2023 ; Paper Acceptance Date : February 20, 2023 ; Paper Published Online : April 15, 2023

User
Subscription Login to verify subscription
Notifications
Font Size

  • Abad, P., Chuliá, H., & Gómez-Puig, M. (2010). EMU and European government bond market integration. Journal of Banking & Finance, 34(12), 2851–2860. https://doi.org/10.1016/j.jbankfin.2009.10.009

  • Aggarwal, S., & Khurana, S. (2018). Empirical examination of stock market volatility: An international comparison. Indian Journal of Finance, 12(1), 47–61. https://doi.org/10.17010/ijf/2018/v12i1/120741

  • Agrawal, P. K., Nandan, T., & Singh, A. P. (2021). Integration of the Indian stock market with select Asian stock markets: An analysis. Indian Journal of Finance, 15(8), 40–51. https://doi.org/10.17010/ijf/2021/v15i8/165817

  • Agur, I., Chan, M., Goswami, M., & Sharma, S. (2019). On international integration of emerging sovereign bond markets. Emerging Markets Review, 38, 347–363. https://doi.org/10.1016/j.ememar.2018.11.006

  • Bhuiyan, R. A., Rahman, M. P., Saiti, B., & Ghani, G. B. (2019). Does the Malaysian Sovereign sukuk market offer portfolio diversification opportunities for global fixed-income investors? Evidence from wavelet coherence and multivariate-GARCH analyses. The North American Journal of Economics and Finance, 47, 675–687. https://doi.org/10.1016/j.najef.2018.07.008

  • Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427–431. https://doi.org/10.1080/01621459.1979.10482531

  • Dickey, D. A., Bell, W. R., & Miller, R. B. (1986). Unit roots in time series models: Tests and implications. The American Statistician, 40(1), 12–26. https://doi.org/10.1080/00031305.1986.10475349

  • Ding, D. K., Harris, F. H., Lau, S. T., & McInish, T. H. (1999). An investigation of price discovery in informationally-linked markets: Equity trading in Malaysia and Singapore. Journal of Multinational Financial Management, 9(3–4), 317–329. https://doi.org/10.1016/S1042-444X(99)00005-5

  • Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276. https://doi.org/10.2307/1913236

  • Georgoutsos, D. A., & Migiakis, P. M. (2013). European sovereign bond spreads: Financial integration and market conditions. Applied Financial Economics, 23(20), 1609–1621. https://doi.org/10.1080/09603107.2013.842637

  • Grubel, H. G. (1968). Internationally diversified portfolios: Welfare gains and capital flows. The American Economic Review, 58(5), 1299–1314. http://www.jstor.org/stable/1814029

  • Gujarati, D. N. (2009). Basic econometrics. Tata McGraw-Hill Education.

  • Harvey, A. C. (1990). The econometric analysis of time series (2nd ed.). The MIT Press.

  • Janakiramanan, S., & Lamba, A. S. (1998). An empirical examination of linkages between Pacific-Basin stock markets. Journal of International Financial Markets, Institutions and Money, 8(2), 155–173. https://doi.org/10.1016/S1042-4431(98)00029-8

  • Jeon, B. N., & Von Furstenberg, G. M. (1990). Growing international co-movement in stock price indexes. Quarterly Review of Economics and Business, 30(3), 15–31.

  • MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563–577.https://doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R

  • Mishra, A. (2019). Foreign exchange, gold, and real estate markets in India: An analysis of return volatility and transmission. Indian Journal of Finance, 13(7), 50–64. https://doi.org/10.17010/ijf/2019/v13i7/145535

  • Nautiyal, N., & Kavidayal, P. C. (2018). A VECM approach to explain dynamic alliance between stock markets. Indian Journal of Finance, 12(11), 49–64. https://doi.org/10.17010/ijf/2018/v12i11/138203

  • Patel, R. (2016). An empirical study of co-movement in selected stock exchanges. Asia-Pacific Journal of Management Research and Innovation, 12(1), 23–30. https://doi.org/10.1177/2319510X16647293

  • Patel, R. (2017). Co-movement and integration among stock markets: A study of 14 countries. Indian Journal of Finance, 11(9), 53–66. https://doi.org/10.17010/ijf/2017/v11i9/118089

  • Patel, R. (2019a). Wealth effects of bank mergers: Evidence from shareholder returns. The Journal of Wealth Management, 22(1), 86–95. https://doi.org/10.3905/jwm.2019.22.1.086

  • Patel, R. (2019b). BRICS emerging markets linkages: Evidence from the 2008 global financial crisis. The Journal of Private Equity, 22(4), 42–59. https://doi.org/10.3905/jpe.2019.1.089

  • Patel, R. (2019c). International trade and stock market integration: Evidence from study of India and its major trading partners. The Journal of Private Equity, 23(1), 90–109. https://doi.org/10.3905/jpe.2019.1.093

  • Patel, R. (2021a). Do portfolio diversification benefits exist? A study of selected developed and emerging markets. Applied Economics Quarterly, 67(2), 177–198. https://doi.org/10.3790/aeq.67.2.177

  • Patel, R. (2021b). ASEAN-5 and Indian financial market linkages: Evidence from cointegration and factor analysis. Capital Markets Review, 29(1), 41–58.

  • Patel, R. (2021c). Equity market integration and portfolio decisions: A study of NASDAQ USA and MSCI emerging markets Asia indexes. The Journal of Wealth Management, 24(1), 11–39. https://doi.org/10.3905/jwm.2021.1.129

  • Patel, R. (2022). Market integration and portfolio diversification benefits: A study of selected developed, emerging, and frontier markets. Journal of Commerce & Accounting Research, 11(1), 58–68.

  • Patel, R., & Patel, D. (2012). The study on co-movement & interdependency of the Indian stock market with selected foreign stock markets. International Refereed Research Journal, 3(2), 3–8.

  • Patel, R., & Patel, M. (2011). An econometric analysis of Bombay Stock Exchange: Annual returns analysis, day-of-the-week effect and volatility of returns. Research Journal of Finance and Accounting, 2(11), 1–9.

  • Patel, R., & Patel, M. (2012). A study of co-movement and interdependence of Indian stock market with selected stock markets. SS International Journal of Business and Management Research, 2(5), 1–8.

  • Patel, R., Goodell, J. W., Oriani, M. E., Paltrinieri, A., & Yarovaya, L. (2022). A bibliometric review of financial market integration literature. International Review of Financial Analysis, 80, 102035. https://doi.org/10.1016/j.irfa.2022.102035

  • Perumandla, S., & Kurisetti, P. (2018). Time-varying correlations, causality, and volatility linkages of Indian commodity and equity markets: Evidence from DCC - GARCH. Indian Journal of Finance, 12(9), 21–40. https://doi.org/10.17010/ijf/2018/v12i9/131558

  • Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58(1), 17–29. https://doi.org/10.1016/S0165-1765(97)00214-0

  • Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346. https://doi.org/10.1093/biomet/75.2.335

  • Plummer, M. G., & Click, R. W. (2005). Bond market development and integration in ASEAN. International Journal of Finance & Economics, 10(2), 133–142. https://doi.org/10.1002/ijfe.268

  • Rughoo, A., & You, K. (2016). Asian financial integration: Global or regional? Evidence from money and bond markets. International Review of Financial Analysis, 48, 419–434. https://doi.org/10.1016/j.irfa.2015.03.007

  • Šimović, P. P., Tkalec, M., Vizek, M., & Lee, J. (2016). Time-varying integration of the sovereign bond markets in European post-transition economies. Journal of Empirical Finance, 36, 30–40. https://doi.org/10.1016/j.jempfin.2015.12.005

  • Singh, A. K., & Shrivastav, R. K. (2018). Evaluating the impact of the global financial crisis on the stock markets of BRICS countries. Indian Journal of Finance, 12(7), 7–27. https://doi.org/10.17010/ijf/2018/v12i7/129967

  • Taningco, A. (2018). ASEAN bond market integration: What drives cross-border bond investment in ASEAN? DLSU Business & Economics Review, 27(2), 15–22.

  • Tsukuda, Y., Shimada, J., & Miyakoshi, T. (2017). Bond market integration in East Asia: Multivariate GARCH with dynamic conditional correlations approach. International Review of Economics & Finance, 51, 193–213. https://doi.org/10.1016/j.iref.2017.05.013


Abstract Views: 209

PDF Views: 0




  • Integration of Bond Markets and Portfolio Diversification : Evidence from the 2008 Global Financial Crisis

Abstract Views: 209  |  PDF Views: 0

Authors

Ritesh J. Patel
Assistant Professor, Institute of Management, Nirma University, Sarkhej - Gandhinagar Highway, Gota, Ahmedabad - 382 481, Gujarat, India
Divyesh J. Gandhi
Assistant Professor (Corresponding Author), MBA Department, Naran Lala School of Industrial Management & Computer Science, Navsari - 396 445, Gujarat, India
Mitesh K. Patel
Assistant Professor, S. V. Institute of Management, Kadi Sarva Vishwavidyalaya, S. V. Campus, Behind Railway Station, Kadi - 382 715, Gujarat, India
Tejas M. Modi
Assistant Professor, St. Kabir Institute of Professional Studies, Nr. SAL Hospital, Off Drive-in Road, Ahmedabad - 380 054, Gujarat, India

Abstract


Purpose : This study aimed to examine the integration between the bond markets of the MSCI Emerging Markets and the USA concerning the 2008 financial crisis.

Methodology : Granger causality and correlation tests were used to assess the short-term integration of the bond markets. The long-term integration was examined using the Johansen co-integration test and VAR analysis.

Findings : Post-crisis, bond markets became more correlated with each other. Due to a lack of market integration in both periods, different portfolio combinations offered the chance for portfolio diversity. The MSCI Emerging Asian markets and US market integration increased with the global financial crisis of 2008. The results of the VAR analysis and impulse response analysis found that innovations in the markets of the USA and China affected the Indian market the most; whereas, the rest of the market had a nominal impact.

Practical Implications : The study has practical implications in the sense that based on the integration, investors might diversify their holdings to achieve a better risk-return balance. The investors can design their investment portfolio accordingly to have an optimal portfolio.

Originality : This study focused on building portfolio diversification with fixed-income securities.


Keywords


Bond Markets, VAR Analysis, MSCI Emerging Asian Markets, Financial Crisis, Portfolio Diversification Opportunity.

JEL Classification Codes : F15, F21, G11, G15

Paper Submission Date : September 15, 2022 ; Paper sent back for Revision : January 15, 2023 ; Paper Acceptance Date : February 20, 2023 ; Paper Published Online : April 15, 2023


References





DOI: https://doi.org/10.17010/ijf%2F2023%2Fv17i4%2F172697