This study examines the presence of excess volatility and market efficiency in government bond markets of ASEAN-5 member countries. The individual country-level bond volatility is verified using an AR-GARCH model with a multivariate extension of panel approach to examine the effects of international diversification. Wavelet coherence is employed to present visually the co-movement between the bond prices in a time–frequency space. The empirical results indicate that the presence of excess volatility is found in all countries. In addition, the findings from the panel analysis reveal evidence of market inefficiency in government bonds but lower excess volatility in the 10-year bond. There is also a large difference of magnitude in excess volatility, suggesting that the ASEAN-5 bond market is inefficient in individual markets. Excess volatility is less persistent regionally with low correlations, implying that balanced portfolios would greatly benefit from international diversifications. The results from the wavelet coherence analysis imply that investment in ASEAN bond prices may yield lower risk reduction for long horizon.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price excludes VAT (USA)
Tax calculation will be finalised during checkout.
Arellano, C., and A. Ramanarayanan. 2012. Default and the Maturity Structure in Sovereign Bonds. Journal of Political Economy 120 (187–232): 2.
Bai, J., T.G. Bali, and Q. Wen. 2019. Common Risk Factors in the Cross-Section of Corporate Bond Returns. Journal of Financial Economics 131 (3): 619–642.
Ball, R. 1978. Anomalies in Relationships Between Securities’ Yields and Yield-Surrogates. Journal of Financial Economics 6 (2–3): 103–136.
Ball, R., and P. Brown. 1968. An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting 6 (2): 159–178.
Bao, J., and J. Pan. 2013. Bond Illiquidity and Excess Volatility. Review of Financial Studies 26 (12): 3068–3103.
Black, F. 1986. Noise. Journal of Finance 41 (3): 529–543.
Caballero, R.J., and A. Krishnamurthy. 2006. Bubbles and Capital Flow Volatility: Causes and Risk Management. Journal of Monetary Economics 1 (35–53): 53.
Campbell, J.Y., and R.J. Shiller. 1988. Stock Prices, Earnings and Expected Dividends. Journal of Finance 43 (3): 661–676.
Cermeño, R., and K.B. Grier. 2006. Conditional Heteroscedasticity and Cross-Sectional Dependence in Panel Data: An Empirical Study of Inflation Uncertainty in the G7 Countries. Panel Data Econometrics Theoretical Contributions and Empirical Applications 274: 259–277.
Chang, H., and A. Dufour. 2019. Modeling Intraday Volatility of European Bond Markets: A Data Filtering Application. International Review of Financial Analysis 63: 131–146.
Chung, K.H., J. Wang, and C. Wu. 2019. Volatility and the Cross-Section of Corporate Bond Returns. Journal of Financial Economics 133 (2): 397–417.
Christofferson, P., V. Errunza, K. Jacobs, and X. Jin. 2014. Correlation Dynamics and International Diversification Benefits. International Journal of Forecasting 30 (3): 807–824.
Cochrane, J.H. 1991. Volatility Tests and Efficient Markets: A Review Essay. Journal of Monetary Economics 27 (3): 463–485.
Culbertson, J. 1957. The Term Structure of Interest Rates. Quarterly Journal of Economics 71 (4): 485–517.
Cushing, M.J., and L.F. Ackert. 1994. Interest Rate Innovations and the Volatility of Long-Term Bond Yields. Journal of Money, Credit and Banking 26 (2): 203–217.
Cutler, D.M., J.M. Poterba, and L.H. Summers. 1989. What Moves Stock Prices? Journal of Portfolio Management 15 (3): 145–166.
De Bondt, W.F., and R. Thaler. 1985. Does the Stock Market Overreact? Journal of Finance 40 (3): 793–805.
Driessen, J., and L. Laeven. 2007. International Portfolio Diversification Benefits: Cross-Country Evidence from a Local Perspective. Journal of Banking & Finance 31 (6): 1693–1712.
Esch, D.N. 2010. Non-normality Facts and Fallacies. Journal of Investment Management 8 (1): 49–61.
Fakhry, B., and C. Richter. 2015. Is the Sovereign Debt Market Efficient? Evidence from the US and the German Sovereign Debt Market. International Economics and Economic Policy 12 (3): 339–357.
Fama, E.F. 1965. The Behaviour of Stock-Market Prices. Journal of Business 38 (1): 34–105.
Fama, E.F. 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance 25 (2): 383–417.
Fama, E.F., L. Fisher, M.C. Jensen, and R. Roll. 1969. The Adjustment of Stock Prices to New Information. International Economic Review 10 (1): 1–21.
French, K.R., and R. Roll. 1986. Stock Return Variances: The Arrival of Information and the Reaction of Traders. Journal of Financial Economics 17 (1): 5–26.
Fung, L., C.-S. Tam, & I.-W. Yu. 2008. Assessing the Integration of Asia’s Equity and Bond Markets. BIS Paper No. 42. Available at: http://ssrn.com/abstract=1331277. Accessed 21 May 2019.
Grinsted, A., J.C. Moore, and S. Jevrejeva. 2004. Application of the Cross Wavelet Transform and Wavelet Coherence to Geophysical Time Series. Nonlinear Processes Geophysics 11 (5/5): 561–566.
Grossman, S.J., and R.J. Shiller. 1981. The Determinants of the Variability of Stock Market Prices. American Economic Review Papers and Proceedings 71 (2): 222–227.
Grossman, S.J., and J.E. Stuglitz. 1980. On the Impossibility of Informationally Efficient Markets. American Economic Review 70 (3): 393–408.
Hopewell, M.H., and G.G. Kaufman. 1973. Bond Price Volatility and Term to Maturity: A Generalised Respecification. American Economic Review 63 (4): 749–753.
Kemper, K., A. Lee, and B.J. Simkins. 2012. Diversification Revisited. Research in International Business and Finance 26 (2): 304–316.
Kleidon, A.W. 1986. Variance Bounds Tests and Stock Price Valuation Models. Journal of Political Economy 94 (5): 953–1001.
Lansing, K.J., and S.F. LeRoy. 2014. Risk Aversion, Investor Information and Stock Market Volatility. European Economic Review 70 (August): 88–107.
LeRoy, S.F. 1973. Risk Aversion and the Martingale Property of Stock Prices. International Economic Review 14 (2): 436–446.
LeRoy, S.F., and C.J. LaCivita. 1981. Risk Aversion and the Dispersion of Asset Prices. Journal of Business 54 (4): 535–547.
LeRoy, S.F., and W.R. Parke. 1992. Stock Price Volatility: Tests Based on the Geometric Random Walk. American Economic Review 82 (4): 981–992.
LeRoy, S.F., and R. Porter. 1981. The Present-Value Relation: Tests based on Implied Variance Bounds. Econometrica 49 (3): 555–574.
Lucas Jr., R.E. 1978. Asset Prices in an Exchange Economy. Econometrica 46 (6): 1429–1445.
Madhavan, A. 1996. Security Prices and Market Transparency. Journal of Financial Intermediation 5 (3): 255–283.
Malkiel, B.G. 2003. The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives 17 (1): 59–82.
Malkiel, B.G. 2005. Reflections on the Efficient Market Hypothesis: 30 Years Later. Financial Review 40 (1): 1–9.
Marsh, T.A., and R.C. Merton. 1986. Dividend Variability and Variance Bounds Tests for the Rationality of Stock Market Prices. American Economic Review 76 (3): 483–498.
McCauley, R.N., S.-S. Fung, & B. Gadanecz. 2002. Integrating the Finances of East Asia. BIS Quarterly Review, Volume December, pp. 83–96.
Modigliani, F., and R. Sutch. 1966. Innovations in Interest Rate Policy. American Economic Review 56 (1/2): 179–197.
Neumeyer, P.A., and F. Perri. 2005. Business Cycles in Emerging Economies: The Role of Interest Rates. Journal of Monetary Economics 52 (2): 345–380.
Roberts, H.V. 1967. Statistical Versus Clinical Prediction of the Stock Market. Chicago: CRSP University of Chicago.
Samuelson, P.A. 1965. Proof that Properly Anticipated Prices Fluctuate Randomly. Industrial Management Review 6 (2): 41–49.
Schwert, G.W. 1989. Why Does Stock Market Volatility Change Over Time? Journal of Finance 44 (5): 1115–1153.
Shiller, R.J. 1979. The Volatility of Long-Term Interest Rates and Expectations Model of the Term Structure. Journal of Political Economy 87 (6): 1190–1219.
Shiller, R.J. 1981a. Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends? American Economic Review 71 (3): 421–436.
Shiller, R.J. 1981b. The Use of Volatility Measures in Assessing Market Efficiency. Journal of Finance 36 (2): 291–304.
Shiller, R.J. 2003. From Efficient Markets Theory to Behavioral Finance. Journal of Economic Perspectives 17 (1): 88–104.
Tamakoshi, G., and S. Hamori. 2014. Greek Sovereign Bond Index, Volatility and Structural Breaks. Journal of Economics and Finance 38 (4): 687–697.
West, K.D. 1988. Dividend Innovations and Stock Price Volatility. Journal of Finance 57 (1): 233–264.
You, L., and R.T. Daigler. 2010. Is International Diversification Really Beneficial? Journal of Banking & Finance 34 (1): 163–173.
Yu, I.-W., L. Fung, and C.-S. Tam. 2007. Assessing Bond Market Integration in Asia. Hong Kong: Hong Kong Monetary Authority.
Zhu, Z. 2001. Are Long-Term Bond Yields Excessively Volatile? Journal of Economic Studies 6 (433–446): 28.
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Tang, KB., Wong, SJ., Lin, SK. et al. Excess volatility and market efficiency in government bond markets: the ASEAN-5 context. J Asset Manag 21, 154–165 (2020). https://doi.org/10.1057/s41260-020-00154-5
- Excess volatility
- Efficient market hypothesis
- Government bonds
- Panel analysis
- Wavelet coherence