Macroeconomic fundamentals, price discovery, and volatility dynamics in emerging bond markets Sylwia Nowak a,⇑ , Jochen Andritzky b , Andreas Jobst c , Natalia Tamirisa d a Asia and Pacific Department, International Monetary Fund, 700 19th Street N.W., Washington, DC 20431, USA b Fiscal Affairs Department, International Monetary Fund, 700 19th Street N.W., Washington, DC 20431, USA c Monetary and Capital Markets Department, International Monetary Fund, 700 19th Street N.W., Washington, DC 20431, USA d Research Department, International Monetary Fund, 700 19th Street N.W., Washington, DC 20431, USA article info Article history: Received 12 May 2010 Accepted 16 February 2011 Available online 24 February 2011 JEL classification: E44 G14 Keywords: Emerging markets Bond pricing Macroeconomic announcements News spillovers High-frequency data abstract This study characterizes volatility dynamics in external emerging bond markets and examines how prices and volatility respond to macroeconomic news. As in mature bond markets, surprises about macroeco- nomic conditions in emerging markets are found to affect both conditional returns and volatility of exter- nal bonds, with the effects on volatility being more pronounced and longer lasting than those on prices. Yet the process of information absorption tends to be more drawn-out than in mature bond markets. Glo- bal and regional macroeconomic news is at least as important as local news for both price and volatility dynamics. Ó 2011 Elsevier B.V. All rights reserved. 1. Introduction Economic data releases form the basis of economic analysis and commentary by market participants. Analysts at brokerages and investment firms pay close attention to the daily flow of economic information, a significant part of it consisting of pre-scheduled re- leases of economic data and indicators. Comparing the new infor- mation against previous forecasts, and adjusting expectations for the future creates economically valuable information that invest- ment houses and clients try to exploit in their trading decisions. Therefore, there should be a close link between the announcement of macroeconomic data and market prices fluctuations, most nota- bly so in the minutes surrounding the scheduled data release. Thus, a better understanding of market reactions should allow market participants to fine tune their investment strategies and risk man- agement. Besides market participants, policy makers are interested in how markets respond to macroeconomic announcements in or- der to design more effective communication strategies. Studies of macroeconomic data releases in mature markets al- ready provide a nuanced view of the impact of news. Given that macroeconomic conditions are the main determinant of the bench- mark curve, government bonds are the asset class that is most di- rectly expected to react to macroeconomic announcements (Fleming and Remolona, 1999). Empirical studies across asset clas- ses confirm that government bonds, next to foreign exchange mar- kets, exhibit a reaction to macroeconomic announcements that is more pronounced than for other asset classes, such as equities (Andersen et al., 2007). The effect of data releases on bond prices is almost instantaneous (Fleming and Remolona, 1999; Balduzzi et al., 2001; Andersen et al., 2007), in line with theoretical models of market microstructure (see O’Hara, 1995, and the references therein). By contrast, price volatility is often found to remain ele- vated for a longer period in response to news (Fleming and Remo- lona, 1999). Compared to mature bond markets, few studies have examined the role of macroeconomic surprises on financial markets in emerging countries. This is a notable gap in the literature, espe- cially given the growing importance of emerging bond markets. To our knowledge, only one study has researched intraday moves 0378-4266/$ - see front matter Ó 2011 Elsevier B.V. All rights reserved. doi:10.1016/j.jbankfin.2011.02.012 ⇑ Corresponding author. Tel.: +1 202 623 6429; fax: +1 202 623 4661. E-mail addresses: snowak@imf.org (S. Nowak), jandritzky@imf.org (J. Andritzky), ajobst@imf.org (A. Jobst), ntamirisa@imf.org (N. Tamirisa). Journal of Banking & Finance 35 (2011) 2584–2597 Contents lists available at ScienceDirect Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf