Faculty of Business Brown Bag Seminar Series | Finance |Asst. Prof. Umut Akovalı

Abstract: Monetary policymaking has undergone significant changes since the global financial crisis, with major central banks adopting unconventional monetary policies (UMPs) to directly influence long-term interest rates. This study examines the effects of both conventional and unconventional monetary policies on sovereign bond return spillovers across different countries and maturities, spanning from January 2013 to January 2023. The analysis employs a methodology that captures the divergence and hierarchical nature of within-maturity bond market return connectedness, particularly noting that connectedness tends to be higher for shorter maturities. The findings indicate that bond market return connectedness intensified following the announcements and during the implementation of large-scale asset purchase (LSAP) programs, as well as during the initial and secondary phases of the COVID-19 pandemic, and amidst aggressive rate hikes by central banks in 2022 to combat inflation. The across-maturity connectedness analysis of yield curve factors reveals that spillovers from short to longer maturities are limited, while the long- and medium-term factors exhibit high spillovers to each other. Panel regression analysis further indicates that a relative increase in central bank assets leads to heightened pairwise connectedness across all maturities, after accounting for controls such as trade, portfolio investment flows, and the geographical distance between countries. In contrast, 'conventional' changes in monetary policy had a significant impact only on short- and medium-term connectedness but did not affect long-term bond market connectedness, signaling the weakening of the transmission channel.