Monetary policy surprises and international bond markets

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Title: Monetary policy surprises and international bond markets
Authors: Bredin, Donal
Hyde, Stuart
O'Reilly, Gerard
Permanent link: http://hdl.handle.net/10197/1160
Date: 4-Oct-2006
Abstract: We examine the impact and possible pillovers effects of unanticipated monetary policy on international bond returns. First, we decompose international bond returns into news regarding future returns, real interest rates and future inflation in the spirit of Campbell and Ammer (1993) for Germany, the UK and the US. We next assess how excess bond returns in these three countries are affected by surprise changes in monetary policy in each country. Our measure of the unanticipated element of monetary policy is based on futures markets rather than the more traditional vector autoregression. Our results indicate that excess bond returns primarily react to domestic as compared to foreign monetary policy surprises. We also find there is a strong divergence between the effects of domestic monetary on excess bond returns in Germany relative to the UK with a surprise monetary tightening in former(latter) leading to a rise(fall)in the excess holding period return and this appears to be driven by news regarding lower(higher) inflation expectations and could be potentially rationalised by differences in the credibility of the monetary policy authority in each country.
Type of material: Working Paper
Publisher: University College Dublin. School of Business. Centre for Financial Markets
Copyright (published version): 2006, Centre for Financial Markets
Keywords: International bond markets;Return variance decomposition;VAR models
Subject LCSH: Bond market
Monetary policy
Decomposition (Mathematics)
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Centre for Financial Markets Working Papers

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