Purpose: This paper investigated the impact of economic policy uncertainty (EPU) in the US, UK, Japan, Italy, India, Germany, France, China, Canada, and Brazil on Indian government bond prices using a new dataset of the Clearing Corporation of India Limited Broad Total Return Index (BTRI) and Liquid Total Return Index (LTRI).

Methodology: We used the quantile regression approach and monthly dataset from January 2004 – December 2020 for the analysis.

Findings: We found that the top 20 government bond prices decreased due to EPU in India, Japan, the US, and the UK. In contrast, the EPU of Canada, China, and the UK had a statistically significant positive impact on BTRI. Further, a negative relationship was found between the top five government bond prices and the EPU of three economies: India, Japan, and the US.Practical

Implications: The analysis will help identify potential risks and vulnerabilities in government bonds. It assists regulators and policymakers in implementing effective risk management measures to safeguard financial stability. The findings will also be useful for investors and market participants to make informed investment decisions.

Originality: From a data standpoint, this is the first study that used CCIL’s BTRI and LTRI data for the first time to canvass the impact of EPU on Indian government bonds as far as we know. Further, we took into account the unique characteristics of the EPU of the top 10 economies and directly compared the reaction of these economies’ EPU to the government bond price fluctuations.

1. Abakah, E. J., Tiwari, A. K., Sharma, A., & Mwamtambulo, D. J. (2022). Extreme connectedness between green bonds, government bonds, corporate bonds and other asset classes: Insights for portfolio investors. Journal of Risk and Financial Management, 15(10), 477. https://doi.org/10.3390/jrfm15100477
2. Akram, T., & Das, A. (2014). The determinants of long-term Japanese government bonds’ low nominal yields (Working Paper No. 818). Levy Economics Institute of Bard College. https://www.levyinstitute.org/pubs/wp_818.pdf
3. Akram, T., & Das, A. (2019). The long-run determinants of Indian government bond yields. Asian Development Review, 36(1), 168–205. https://doi.org/10.1162/adev_a_00127
4. Altavilla, C., Giannone, D., & Modugno, M. (2017). Low frequency effects of macroeconomic news on government bond yields. Journal of Monetary Economics, 92, 31–46. https://doi.org/10.1016/j.jmoneco.2017.08.004
5. Andritzky, J. R. (2012). Government bonds and their investors: What are the facts and do they matter? (IMF Working Papers WP/12/158). International Monetary Fund. https://doi.org/10.5089/9781475504514.001
6. Ardagna, S., Caselli, F., & Lane, T. (2007). Fiscal discipline and the cost of public debt service: Some estimates for OECD countries. The B.E. Journal of Macroeconomics, 7(1), 1–33. https://doi.org/10.2202/1935-1690.1417
7. Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
8. Balcilar, M., Gupta, R., Kim, W. J., & Kyei, C. (2019). The role of economic policy uncertainties in predicting stock returns and their volatility for Hong Kong, Malaysia and South Korea. International Review of Economics & Finance, 59, 150–163. https://doi.org/10.1016/j.iref.2018.08.016
9. Barr, D. G., & Campbell, J. Y. (1997). Inflation, real interest rates, and the bond market: A study of UK nominal and index-linked government bond prices. Journal of Monetary Economics, 39(3), 361–383. https://doi.org/10.1016/S0304-3932(97)00027-5
10. Buchinsky, M. (1995). Estimating the asymptotic covariance matrix for quantile regression models a Monte Carlo study. Journal of Econometrics, 68(2), 303–338. https://doi.org/10.1016/0304-4076(94)01652-G
11. Chernov, M., Creal, D., & Hördahl, P. (2019). Determinants of Asia-Pacific government bond yields (BIS Paper No. 102). Bank for International Settlements. https://www.bis.org/publ/bppdf/bispap102_c_rh.pdf
12. Claessens, S., Klingebiel, D., & Schmukler, S. L. (2007). Government bonds in domestic and foreign currency: The role of institutional and macroeconomic factors. Review of International Economics, 15(2), 370–413. https://doi.org/10.1111/j.1467-9396.2007.00682.x
13. Colombo, V. (2013). Economic policy uncertainty in the US: Does it matter for the Euro area? Economics Letters, 121(1), 39–42. https://doi.org/10.1016/j.econlet.2013.06.024
14. Dakhlaoui, I., & Aloui, C. (2016). The interactive relationship between the US economic policy uncertainty and BRIC stock markets. International Economics, 146, 141–157. https://doi.org/10.1016/j.inteco.2015.12.002
15. Darbha, G., Dutta Roy, S., & Pawaskar, V. (2002). Idiosyncratic factors in pricing sovereign bonds: An analysis of the government of India bond market. Journal of Emerging Market Finance, 1(2), 157–181. https://doi.org/10.1177/097265270200100202
16. Fang, L., Yu, H., & Li, L. (2017). The effect of economic policy uncertainty on the long-term correlation between U.S. stock and bond markets. Economic Modelling, 66, 139–145. https://doi.org/10.1016/j.econmod.2017.06.007
17. Faniband, M. (2020). The behaviour of trading volume: Evidence from money market instruments. Indian Journal of Finance, 14(8–9), 69–79. https://doi.org/10.17010/ijf/2020/v14i8-9/154949
18. Faniband, M. (2021). Indian government bonds sensitivity to macroeconomic and non-macroeconomic factors: A quantile regression approach. Afro-Asian Journal of Finance and Accounting, 11(5), 772–786. https://doi.org/10.1504/AAJFA.2021.119480
19. Faniband, M., & Faniband, T. (2021). Government bonds and stock market : Volatility spillover effect. Indian Journal of Research in Capital Markets, 8(1–2), 61–71. https://doi.org/10.17010/ijrcm/2021/v8i1-2/165087
20. Fleming, M. J., & Remolona, E. M. (1999). What moves bond prices ? The Journal of Portfolio Management, 25(4), 28–38. https://doi.org/https://doi.org/10.3905/jpm.1999.319756
21. Francová, B. (2017). Valuation of government bonds: The exchange rate is an important aspect. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(6), 1911–1916. https://doi.org/10.11118/actaun201765061911
22. Green, T. C. (2004). Economic news and the impact of trading on bond prices. The Journal of Finance, 59(3), 1201–1233. https://doi.org/10.1111/j.1540-6261.2004.00660.x
23. Gurinovich, A. G., & Smirnikova, J. L. (2021). Debt policy of the Russian regions: Economic and legal research. Indian Journal of Finance, 15(1), 23–35. https://doi.org/10.17010/ijf/2021/v15i1/157012
24. Kalra, N., & Gupta, G. (2023). Impact of economic policy uncertainty on the Indian stock market: An empirical investigation. Indian Journal of Finance, 17(3), 50–63. https://doi.org/10.17010/ijf/2023/v17i3/172672
25. Kinoshita, N. (2006). Government debt and long-term interest rates (IMF Working Papers No 06/63). International Monetary Fund. https://doi.org/10.5089/9781451863239.001
26. Koenker, R., & Bassett Jr., G. (1978). Regression quantiles. Econometrica, 46(1), 33–50. https://doi.org/10.2307/1913643
27. Li, X., Yang, B., Su, Y., Qi, Y., & An, Y. (2022). Macro factors and bond returns in China. Emerging Markets Finance and Trade, 58(7), 1871–1882. https://doi.org/10.1080/1540496X.2021.1941860
28. Lithin, B. M., Chakraborty, S., Iyer, V., Nikhil, M. N., & Ledwani, S. (2023). Modelling asymmetric sovereign bond yield volatility with univariate GARCH models: Evidence from India. Cogent Economics & Finance, 11(1), Article 2189589. https://doi.org/10.1080/23322039.2023.2189589
29. Panigrahi, A., Sisodia, M., & Vachhani, K. (2022). Impact of global and domestic economic variables on 10-year Indian government bond yield: An empirical study. IUP Journal of Applied Finance, 28(2), 5–23.
30. Patel, R. J., Gandhi, D. J., Patel, M. K., & Modi, T. M. (2023). Integration of bond markets and portfolio diversification : Evidence from the 2008 global financial crisis. Indian Journal of Finance, 17(4), 27–44. https://doi.org/10.17010/ijf/2023/v17i4/172697
31. Poghosyan, T. (2014). Long-run and short-run determinants of sovereign bond yields in advanced economies. Economic Systems, 38(1), 100–114. https://doi.org/10.1016/j.ecosys.2013.07.008
32. Rangotra, R. (2020). Predicting economic activity using the slope of yield curve: A study of Indian economy. Indian Journal of Finance, 14(4), 39–51. https://doi.org/10.17010//ijf/2020/v14i4/151707
33. Sahoo, S., Behera, H., & Trivedi, P. (2019). Return and volatility spillovers between currency and bond markets in India. Macroeconomics and Finance in Emerging Market Economies, 12(2), 155–173. https://doi.org/10.1080/17520843.2018.1512509
34. Saini, P., & Muniyoor, K. (2022). Does economic development affect public debt accumulation? Empirical evidence from India. Indian Journal of Finance, 16(4), 47–59. https://doi.org/10.17010/ijf/2022/v16i4/169174
35. Sharma, S. C., Chhabra, B., & Saxena, N. (2020). Empirical study on the factors affecting bond market returns-evidence from Indian markets. International Journal of Bonds and Derivatives, 4(2), 114–125. https://doi.org/10.1504/ijbd.2020.109335
36. Thumrongvit, P., Kim, Y., & Pyun, C. S. (2013). Linking the missing market: The effect of bond markets on economic growth. International Review of Economics & Finance, 27, 529–541. https://doi.org/10.1016/j.iref.2013.01.008
37. Yakean, S. (2013). Determinants of the Thai corporate bond liquidity. Indian Journal of Finance,7(8), 17–23. https://www.indianjournaloffinance.co.in/index.php/IJF/article/view/72095
38. Zaremba, A., & Schabek, T. (2017). Seasonality in government bond returns and factor premia. Research in International Business and Finance, 41, 292–302. https://doi.org/10.1016/j.ribaf.2017.04.036
39. Zhang, D., Lei, L., Ji, Q., & Kutan, A. M. (2019). Economic policy uncertainty in the US and China and their impact on the global markets. Economic Modelling, 79, 47–56. https://doi.org/10.1016/j.econmod.2018.09.028