Government Bond Yield Volatility and It's Determinants: The Case of Indonesia Government Bond

Harjum Muharam 

Diponegoro University - Economics and Business Faculty
December 12, 2013

The First International Conference on Finance and Banking Faculty of Economics and Business Diponegoro University-Indonesia Financial Management Association (IFMA), December 11-12, 2013, Bali, Indonesia 
Abstract:      

This research is conducted from gaps of research findings regarding factors influencing government bond yield. The aim of this research is to develop a model of government bond yield determinants and to test hypothesis about the effect of inflation, foreign reserves, local interest rate, stock market return, exchange rate, foreign interest rate, world oil prices, real sector performance, and conditional variances on government bond yield. Time series process and multifactor models are employed. The model combines two approaches called Multifactor EGARCH-M Model. The population is Indonesian government bond, denominating in IDR and has a fixed coupon rate. The sample selected is five years tenor bond. The findings are: (1) Indonesia’s government bond yield has volatility clustering as measured by GARCH process; (2) based on adjusted R2, logL, Akaike Information Criterion (AIC) and Schwarz Criterion (SC), Multifactor EGARCH-M Model is the best model among six models developed; (3) as a proxy of market risk and default risk, GARCH-M has the biggest effect on its yield followed by non gold reserve; (4) the other variables having influences on government bond yields are: local interest rate, stock market return, exchange rate, foreign interest of rate, and world oil price. Inflation and real sector performance have no effect on government bond yields.

Number of Pages in PDF File: 25

Keywords: yield, volatility, government bonds, multifactors model, conditional variance, GARCH

JEL Classification: G120