Analysis of Nonlinear Comovement of Benchmark Thai Government Bond Yields

The COVID-19 pandemic is a recent and ongoing extreme event that has impacted all financial markets. Indeed, it impacts the bond or debt market, which is one of the most important financial markets. The main role of the bond market in the economy is to enable the government, firms and institutions to lend and borrow money on acceptable terms and conditions. Since the COVID-19 pandemic began, the bond market has been affected in many different ways including in bond market comovement. For fund firms, emerging market bonds are a vital investment instrument as they tend to offer higher yields than developed market bonds. Hence, this paper analyzes the COVID-19 impact of: 1) nonlinear bivariate comovement between benchmark loan bonds (LBs) in emerging market bonds, in particular the Thai bond market, which is one of the most important Asian bond markets; and 2) nonlinear bivariate comovement between emerging Thai benchmark bonds and developed benchmark bonds in the United States (US), United Kingdom (UK) and Japanese bond markets. An asymmetric generalised autoregressive conditional heteroskedastic (GARCH) model with a mixture of generalized Pareto and Gaussian distributions is applied as a marginal model in step one. Sixteen candidates for a bivariate copula function are fitted and the best fit copula selected in order to obtain numerical nonlinear comovement measures. This is also known as the Inference for the Margins (IFM) method. Empirical results reveal that the COVID-19 pandemic impact in the emerging Thai bond market has characteristics such as in the scale of nonlinear comovement, asymmetric dependence and upper and lower tail dependence. In general, COVID-19 has impacted the comovement between emerging Thai market bonds by increasing the nonlinear comovement, and generating more asymmetric and more extreme upper and lower tail dependence. While emerging Thai market bonds tend to less nonlinear comovement, more symmetric and tail independence are seen with developed market bonds due to the impact of COVID-19.