Linearity and stationarity of G7 government bond returns

Liew, Venus Khim-Sen and Qiao, Zhuo and Wong, Wing-Keung (2008): Linearity and stationarity of G7 government bond returns.

Abstract

This study investigates the linearity and stationarity properties of government bond returns for the G7 economies. Our results from Luukkonen et al. (1988) linearity test reveal the nonlinear nature of all of the G7 bond returns. Furthermore, we had determined that they are stationary by the Kapetanios et al. (2003) nonlinear unit root test. In sum, it can be concluded that G7 government bond returns are stationary but possess a nonlinear feature. Our findings provide useful information for researchers interested in bond markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: government bond returns; G7; linearity, stationarity; nonlinear
• Subjects: G - Financial Economics > G1 - General Financial Markets; N - Economic History > N2 - Financial Markets and Institutions; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General

References

Alexander, G., A. Edwards, and M. Ferri. (2000). What does NASDAQ’s high-yield bond market reveal about bondholder-stockholder conflicts? Financial Management, 23–39.

Anoruo, E., Liew, V.K.S. and Elike, U. (2006) Nonlinear real exchange rate behaviour: are African countries exceptional? International Research Journal of Finance and Economics, 1, 97 – 110.

Bachmeier, L. (2002) Is the term structure nonlinear? A semi parametric investigation, Applied Economics Letters, 9 (2), 151 – 153.

Baharumshah, A.Z. and Liew, V.K.S. (2006) Forecasting performance of exponential smooth transition autoregressive exchange rate models, Open Economies Review, 17, 261-277.

Baharumshah, A.Z., Liew, V.K.S. and Hamzah, N.A. (2008) Real interest rate parity in the ASEAN-5 countries: a nonlinear perspective, Applied Economics Letters, 15 (2), 955 – 958.

Baillie, R.T. and Kilic, R. (2006) Do asymmetric and nonlinear adjustments explain the forward premium anomaly? Journal of International Money and Finance, 25, 22 – 47.

Baum, C.F., Barkoulas, J.T. and Caglayan, M. (2001) Nonlinear adjustment to purcahsing ower parity in the ost-Bretton Woods era, Journal of International Money and Finance, 20, 379-399.

Baur, D., Lucey, B.M. (2006). Flight-to-quality or contagion? An empirical analysis of stockbond correlations. IIIS Discussion Paper No. 122.

Bodart, V. and Reding, P. (1999) Exchange rate regime, volatility and international correlations on bond and stock markets, Journal of International Money and Finance, 18, 133 – 151.

Campbell, J.Y. (1986) A defense of traditional hypotheses about the term structure of interest rates, Journal of Finance, 41, 183-193.

Campbell, J. Y. and Ammer, J. (1993) What moves the stock and bond markets? A variance decomposition for long term asset returns, Journal of Finance, 48(1), 3–37.

Chong, T.T.L., Hinich, M., Liew, V.K.S. and Lim, K.P. (2008) Time series test of nonlinear convergence and transitional dynamics, Economics Letters, 100, 337-339.

Cheung, Y-W. and Lai, K.S. (2001) Long memory and nonlinear mean reversion in Japanese yen-based real exchange rates, Journal of International Money and Finance, 20, 115–132.

Christiansen C., (2007) Volatility-spillover effects in European bond markets, European Financial Management, 13(5), 923-948.

Connolly, R., Stivers, C. and Sun, L. (2005). Stock Market Uncertainty and the Stock- Bond Return Relation, Journal of Financial and Quantitative Analysis, 40, 161- 194.

Dickey, D.A. and Fuller, W.A. (1979) Distribution of the estimators for autoregressive time series with a unit root, Journal of the American Statistical Association, 74, 427– 431.

Driessen, J., Melenberg, B. and Nijman, T. (2003) Common factors in international bond returns, Journal of International Money and Finance, 22(5), 629-656.

Elliot, G. Rothenberg, T.J. and Stock, J.H. (1996) Efficient tests for an autoregressive unit root, Econometrica, 64, 813-836.

Gulko, L.(2002) Decoupling. Journal of Portfolio Management, 28, 59-67.

Hunter, D.M. and Simon, D.P. (2005) A conditional assessment of the relationships between the major world bond markets, European Financial Management, 11(4), 463– 482.

Ilmanen, A. (2003) Stock-bond correlations. Journal of Fixed Income, 13, 55-66.

Jones, D.S., and Roley, V.V. (1983) Rational expectations and the expectations model of the term structure: a test using weekly data, Journal of Monetary Economics, 12, 453-465.

Kanas, A. (2005) Nonlinearity in the stock price-dividend relation, Journal of International Money and Finance, 24, 583 – 606.

Kapetanios, G., Y. Shin and A. Snell (2003) Testing for a unit root in the nonlinear STAR framework, Journal of Econometrics, 112, 359 – 379.

Keim, D.B. Stambaugh, E.B., 1986. Predicting returns in the stock and bond markets, Journal of Financial Economics, 17, 357-390

Kwan, S. H. (1996) Firm-specific information and the correlation between individual stocks and bonds, Journal of Financial Economics, 40, 63-80.

Laopodis, N. T. (2004) Monetary policy implications of comovements among long-term interest rates, Journal of International Financial Markets, Institutions, & Money, 14,135–64.

Liew, V.K.S. and Lim, K.P. (2005) Income divergence? Evidence of nonlinearity in the East Asian economies, Economics Bulletin, 15(1), 1-7.

Liew, V.K.S., Chong, T.T.L. and Lim, K.P. (2003) The inadequacy of linear autoregressive models for real exchange rates: empirical evidence from Asian economies, Applied Economics, 35, 1387–1392.

Liew, V.K.S., Baharumshah, A.Z. and Chong, T.T.L. (2004) Are Asian real exchange rates stationary? Economics Letters, 83, 313 – 316.

Liew, V.K.S. and Lim, K.P. (2005) Income divergence? Evidence of nonlinearity in the East Asian economies, Economics Bulletin, 15(1), 1–7. Lim K.P. and Liew V.K.S. (2007) Nonlinear mean reversion in stock prices: Evidence from Asian markets, Applied Financial Economics Letters, 3, 25-29. Luukkonen, R., Saikkonen, P. and Teräsvirta, T. (1988). Testing linearity against smooth transition autoregressive models, Biometrika, 75, 491–499.

Markowitz, H.(1952). Portfolio Selection. Journal of Finance, 7, 77-91.

Markowitz, H. (1959). Portfolio Selection: Efficient Diversification of Investments, Cowles Foundation Monograph #16 (Wiley 1959); reprinted in a 2nd edition with Markowitz’s hindsightcomments on several chapters and with an additional bibliography supplied by Mark Rubinstein (Blackwell 1991).

Narayan, P.K. (2006) The behaviour of US stock prices: evidence from a threshold autoregressive model, Mathematics and Computers in Simulation, 71, 103 – 108

Pérez-Rodríguez, J.V., Ledesma-Rodríguez, F. and Torra-Porras, S. (2009) Purchasing power parity and nonlinear adjustment, Applied Economics Letters, 16 (1), 35 – 38.

Phillips, P.C.B. and Perron, P. (1988) Testing for a unit root in time series regression, Biometrika, 75, 335-346.

Sarno, L. (2000) Real exchange rate behaviour in high inflation countries: empirical evidence from Turkey, 1980-1997, Applied Economics Letters, 7(5), 285-291.

Schiller, R.J., Campbell, J.Y. and Schoenholtz, K.L. (1983). Forward rates and future policy: interpreting the term structure of interest rates, Brooklings Papers on Economic Activity, 1, 173-223.

Shively, P.A. (2003) The nonlinear dynamics of stock prices, Quarterly Review of Economics and Finance, 43, 505-517.

Shively, P.A. (2005) Threshold nonlinear interest rates, Economics Letters, 88, 313–317.

Taylor, M.P., Peel, D.A. and Sarno, L. (2001) Nonlinear mean-reversion in real exchange rates: toward a solution to the purchasing power parity puzzles, International Economic Review, 42, 1015 – 1042.

Van Dijk, D. and Franses, P.H. (2000) Nonlinear error-correction models for interest rates in the Netherlands, in W.A. Barnett, D. F. Hendry, S. Hylleberg, T. Teräsvirta, D. Tjøstheim, A.H. Würtz (eds.), Nonlinear Econometric Modeling in Time Series Analysis, Cambridge: Cambridge University Press, 203-227.

Xu, C. (2007) Feasibility Test: Bond Return forecasting in the German Financial Market, Master Thesis, Center of Applied Statistics and Economics, Humboldt University, Berlin.