The role of time‐varying rare disaster risks in predicting bond returns and volatility

Abstract

This paper aims to provide empirical evidence to the theoretical claim that rare disaster risks affect government bond market movements. Using a nonparametric quantiles‐based methodology, we show that rare disaster‐risks affect only volatility, but not returns, of 10‐year government bond of the United States over the monthly period of 1918:01 to 2013:12. In addition, the predictability of volatility holds for the majority of the conditional distribution of the volatility, with the exception of the extreme ends. Moreover, in general, similar results are also obtained for long‐term government bonds of an alternative developed country (UK) and an emerging market (South Africa).

Forecasting realized volatility of international REITs: The role of realized skewness and realized kurtosis

“…One can refer toDemirer et al (2018),Gupta et al (2019aGupta et al ( , 2019b,Gkillas et al (2020),Bouri et al (forthcoming) who have highlighted the role of rare disaster risks proxied by the International Crisis Behavior (ICB) database and El Niño-Southern Oscillation (ENSO) index in predicting returns and volatility of the various asset and commodity markets.…”

Historical volatility of advanced equity markets: The role of local and global crises

“…In other words, when market volatility is extremely low or high, the information content of crises, irrespective of its type, i.e., domestic or global, is irrelevant, with all that mattering being the past levels of RV. Understandably, when volatility is low (i.e., markets are calm), agents do not require information from predictors (in our case, domestic and global crises) to predict the path of future volatility, and when volatility is already at its upper end, information from crises is possibly of no value, given that agents are likely to be herding (Gupta, et al, 2018). 7 rejection of the null of no-Granger causality variable to RV for a specific quantile (θ), at 1 percent, 5 percent and 10 percent levels of significance respectively, with corresponding critical values being 2.58, 1.96, and 1.645.…”

Effect of rare disaster risks on crude oil: evidence from El Niño from over 145 years of data

“…al., 2011for example, Berkmann et. al., , 2017Gupta et al, 2019aGupta et al, , 2019b, and given the well-known spillover effects between financial and oil markets (see for example, Tiwari et al, 2013Tiwari et al, , 2018Balcilar et al, 2015Balcilar et al, ,2017Nazlioglu et al, 2020), there also exists an indirect channel through which rare disaster risks can affect returns and volatility of oil. Accordingly, the effect of time varying rare disaster risks on return and volatility dynamics in the oil market is supported both from an economic and empirical point of view.…”