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Summary

Interest rate volatility is a key indicator for bond market efficiency and has significant impact on the market participants' decision-making. While excessive volatility brings uncertainty in the investment performance and issuer's funding cost, undersized volatility is likely to indicate that price-finding mechanism is not well functioning.

Evaluating the yield volatility in Korean treasury bond(KTB) market, we find that the volatility rapidly decreases after the global financial crisis and drops even further after the fiscal crisis in Europe. Considering the ordinal shift and the level of market interest rates along with related macro-economic factors, we conclude that the yield volatility in KTB market is excessively lowered.

We also find that the yield volatility in the corporate bond market is mainly driven by the KTB market. While the size of corporate bond market volatility is similar to one in KTB market, the volatility in the credit spread is extremely small. This implies that the price-finding efficiency in the corporate bond market is low because of the shallow market liquidity.