Correlations across Asia-Pacific bond markets and the impact of capital flow measures

BIS Working Papers No 472
December 2014

Published in: Pacific-Basin Finance Journal, vol 34, September 2015, pp 71-101.

Using a novel database on capital flow measures in Asia over 2004−2013, we investigate the impact of bond inflow measures on the cross-market correlations of weekly bond fund flows and of daily bond returns in 12 Asia-Pacific economies, after controlling for global, regional and local factors. We find that a bond inflow measure taken by a country tends to increase the correlation of bond flows into the country with those into other countries in the region. In particular, a country's policy actions to loosen (ie increase) bond inflows significantly increase bond flow correlations, but policy actions to tighten (ie decrease) bond inflows have no significant impact. We also find that bond inflow measures increase bond return correlations in the long run. These results can be explained by the signalling hypothesis, under which global investors expect that when a country takes a bond inflow measure other countries to take similar actions, so that they increase or decrease their investment in the region at the same time.

JEL classification: G15, G28

Keywords: Bond flow, bond return, cross-market correlation, capital flow measure