Modelling Indonesian sovereign bond yield volatility using GARCH models
DOI:
https://doi.org/10.26905/afr.v8i3.17075Keywords:
Asymmetric shocks, GARCH models, Indonesia, Sovereign bond yield volatility, Volatility persistenceAbstract
This study examined the volatility of Indonesian government bond yields across three market periods: pre-COVID-19, the COVID-19 pandemic, and the Russia-Ukraine war. Using daily secondary data from January 2018 to December 2023, this study compared symmetric (GARCH and IGARCH) and asymmetric (GJR-GARCH and EGARCH) models across short-, medium-, and long-term maturities. It highlighted the limited evidence on how volatility persistence and asymmetric responses vary across maturities in Indonesia’s sovereign bond market under changing market conditions. The results identify the EGARCH model with a generalized error distribution (GED) as the preferred specification. Volatility persistence varies across maturities, with long-term yields exhibit faster decay than short- and medium-term yields. Significant asymmetric effects are also identified for medium- and long-term yields, indicating that positive shocks increase volatility more than negative shocks in these particular segments. In addition, volatility persists longer during bearish market phases than during the pre-pandemic bullish phase. The causality tests revealed limited evidence of a causal relationship between inflation and 3-year bond yield volatility, while no significant causal relationships were found for the other macroeconomic relationships examined. These findings contribute to the maturity-specific sovereign bond risk research and offer practical guidance for volatility monitoring, portfolio allocation, and risk management during periods of heightened economic and geopolitical uncertainty.
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