Government Bond Market Integration in ASEAN Countries

Abstract

The development and the integration of the bond market is becoming an important policy issue in ASEAN countries. We investigate government bond market integration in four ASEAN countries. We first decompose yields in ASEAN countries and the United States into global and regional factors using the approximate dynamic factor model. Next, we employ the dynamic conditional correlation method to find that regional markets have been integrated in the sense that their yields are highly and positively correlated with the common regional factor. We also find that the correlation between the global factor and the yield has different signs in different countries. Therefore, we use the pooled mean estimation method to investigate the determinants that make the correlation positive in some countries and negative in others. We find that public interest payments is an important determinant and discover a threshold that depends on public interest payments. The global factor has a significantly negative effect on the yield spread when public interest payments are above the threshold value. From above results, we can conclude that market discipline has been operating in the four ASEAN government bond markets in the sense that investors discriminate between the creditworthiness of the governments’ bonds by focusing on the public interest payments.