Risk factors in Australian bond returns

Bianchi, Robert J.; Drew, Michael E.; Roca, Eduardo; Whittaker, Timothy

doi:10.1111/acfi.12174

Cited by 3 publications

(6 citation statements)

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“…Given the importance of monetary policy as a determinant of yields, the cash rate set by the RBA is included to capture monetary policy movements. Additionally, in light of the findings by Bianchi et al (2017), the Australian sovereign credit rating is included. To this end, the rating scale proposed by Cantor and Packer (1996) is used in this study to transform credit ratings into a numerical series, with a numerical scale ranging from 1 to 16, where 1 corresponds with the lower rating, and 16 with the highest.…”

Section: Data Discussionmentioning

confidence: 99%

“…The drivers of sovereign bond yields and bond yield spreads have been widely considered in literature-see, for example, Favero et al (2010), Aristei and Martelli (2014), Poghosyan (2014), and Afonso et al (2015). Literature broadly provides evidence that monetary policy is a key driver of short to medium sovereign bond yields, as well as a key determinant of term spreads (Poghosyan 2014;Bianchi et al 2017). Literature also shows that yields and term spreads are significantly impacted by the fiscal accounts of the issuing government, macroeconomic conditions and international financial risks (Afonso et al 2015).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Literature also shows that yields and term spreads are significantly impacted by the fiscal accounts of the issuing government, macroeconomic conditions and international financial risks (Afonso et al 2015). Furthermore, Bianchi et al (2017) found sovereign credit ratings to have a significant impact on yields. The study by Bianchi et al (2017) focused specifically on the Australian bond market and provides evidence that Australian sovereign bond yields are driven by similar factors, as identified by the broader body of literature.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Furthermore, Bianchi et al (2017) found sovereign credit ratings to have a significant impact on yields. The study by Bianchi et al (2017) focused specifically on the Australian bond market and provides evidence that Australian sovereign bond yields are driven by similar factors, as identified by the broader body of literature.…”

Section: Literature Reviewmentioning

confidence: 99%

“…However, despite some recent research to this end (see, for example, Gupta et al (2021)), research remains very limited. Most research focuses on political risk, evidenced for example by Afonso et al (2015) and Bianchi et al (2017). However, given the distinctly different nature of geopolitical risk, and the importance of government bond yields to the financial stability of a local economy, there is room for the body of knowledge on how geopolitical risk impacts bond yields to be expanded.…”

Section: Introductionmentioning

confidence: 99%

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Geopolitical Risks and Yield Dynamics in the Australian Sovereign Bond Market

Wet

2023

JRFM

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Geopolitical risks and shocks such as military conflicts, terrorist attacks, and war tensions are known to cause significant economic downturns. The main purpose of this paper is to determine the dynamics between Australian sovereign bond yields and geopolitical risk. This is achieved by employing a quantile regression analysis. The findings of this study indicate that the impact of geopolitical risk on Australian sovereign yield dynamics is asymmetrical. Furthermore, an increase in geopolitical risk only impacts short-term yields at extreme regimes. However, the impact is, by and large, insignificant. On the other hand, an increase in geopolitical risk does have a statistically significant positive impact on medium- and long-term yields across most quantiles. Lastly, an increase in geopolitical risk tends to result in a steeper yield curve at the belly of the curve but causes the yield curve to flatten at the long end. This study is the first study that holistically examines the dynamics between geopolitical risk and Australian sovereign bond yields. The study thereby contributes to the body of knowledge on Australian bond yields, specifically, and adds to the sparse body of knowledge on the dynamics between geopolitical risk and sovereign bond yields. The findings of this study have implications for monetary policy makers, given that shifts in sovereign bond yields could impact all three core mandates of the Australian Reserve Bank. Furthermore, changes in the slope of the yieldcurve could be used by monetary policy makers to pre-empt changes in future economic growth. The results of this study also relate to fiscal policy formulation, given that yields directly impact the cost of government borrowing. Lastly, portfolio managers could benefit from the results of this study, as these results provide information on the ability of Australian sovereign bonds to hedge against geopolitical risk.

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Section: Data Discussionmentioning

confidence: 99%