The Bond Market In a Global Context: How Macroeconomic Shocks Affect Fixed Income Securities

Arnold Attila Csecs & Alexander Pauly

Student thesis: Master thesis


Market participants react instantly to macroeconomic news which can make bond yields and prices move. In an era of information abundance, traders and investors need to pay more and more attention to maroeconomic announcements and to be vigilant when it comes to price adjustments in the market. However, market marticipants process the information differently depending on the country of consideration and the importance of the economy. Each region has its own particularity as well as its own monetary policy and macroeconomic structure. Hence, market players react to different news in different fashion.
In our master thesis we test this regional and country differences. For this purpose, we gather information about bond yields and macroeconomic news and quantify the most influentiable annoucments in our sample. Our goal is to capture approximately the same macroecnomic news in each country and the same bond types. We are using government bond indices with different maturities to capture all parts of the term structure. This gives us a whole picture about the relationship. Moreover, we include the most developed economies (U.S., Germany, Australia and Japan) in our analysis to provide an overview of the differences between these regions. In a very first step, we test the direct effects for each domestic macro news. In a second step, we look for spilloever effects from U.S to the other countries. The latter is important because U.S. is considered to be the most developed economy and has shown to be very influential in the past. Our approach includes two separate control variables for uncertainty in the market and a proxy for unanticipated monetary policy actions. From the estimation results, we see that closely monitored news on unemployment, inflation and production appear to play an important role when it comes to price adjustments in the domestic bond market. Moreover, the U.S. economy, indeed, exhibits a strong spillover effect on German and Australian markets. Japan does not seem to be strongly affected by U.S. macroeconomic news. Interestingly, the magnitude and the signifance of the same announcement differs from Germany to Australia. These findings are in line with earlier research but our slightly different methodology gives a new edge in this research area and may help to better isolate monetary and news effects.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages109