Volatility spillover of the U.S. quantitative easing policies: Evidence from BRIC bond markets

Abstract

Since the aftermath of 2008 global financial crisis, central banks in major economies launched a variety of unconventional monetary policies to stimulate the depressed economies under zero lower bound. The implementations of the unconventional monetary policies, such as the announcement of Quantitative Easing (QE) policy, injected a large amount of liquidity into the global financial markets and economies. The increase in liquidity level brings major impacts on the global financial markets, especially the emerging markets. This paper empirically assesses the volatility spillover effects of the U.S. QE policies on emerging bond markets, particularly the BRIC (Brazil, Russia, India and China) markets. The results show a pronounced volatility spillover effects from the U.S QE period (the U.S. QE1 and QE2 periods), BRIC bond yield volatilities increased significantly in response to U.S. QE policy shocks. During the U.S. QE3 period, the BRIC bond yield volatilities reduced significantly. Moreover, the dynamic correlation between the U.S. bond market and the BRIC markets are close to zero or even negative. This indicates that the U.S. QE volatility spillover effects on the BRIC markets are not because of the interactions among the markets, but from the U.S. QE impacts on changes in the global liquidity level.