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Volatility Linkage of Nominal and Index-linked Bond Returns: A Multivariate BEKK-GARCH Approach

Author

Listed:
  • Noureddine Benlagha

    (Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh, SAUDI ARABIA)

Abstract

This paper investigates the behavior of volatility linkage between nominal and indexlinked bond returns using a multivariate BEKK-GARCH approach. Based on daily return data for French bonds with different maturity dates and different reference indices, our analysis reveals two empirical regularities. First, the relationship, in uncertainty, between nominal and index-linked bond returns is strongly significant and is mostly due to the liquidity risk. Second, the co-persistence in volatility returns for the studied bonds is also confirmed. This empirical study provides a useful method that may be employed by decision makers to quantitatively manage and reallocate their portfolios.

Suggested Citation

  • Noureddine Benlagha, 2014. "Volatility Linkage of Nominal and Index-linked Bond Returns: A Multivariate BEKK-GARCH Approach," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 49-60, November.
    • Handle: RePEc:bap:journl:140404
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    References listed on IDEAS

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    More about this item

    Keywords

    Index-linked bond; Liquidity risk; Volatility linkage; BEKK-GARCH; Co-persistence;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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