"4 UNIVERSITY OF ECONOMICS AND BUSINESS FACULTY OF FINANCE AND BANKING Or’ 90O- GRADUATION THESIS EXAMINING THE CO-MOVEMENT AMONG SHORT SHADOW RATES DURING COVID-19 TEACHER INSTRUCTION : Dr. LE HONG THAI STUDENT NAME : NGUYEN PHUONG ANH STUDENT CODE : 19050606 CLASS : QH-2019-E TCNH CLC 1 Hanoi. May 2023 DECLARATION I hereby declare that this graduation thesis is my own work, with the support of my supervisor, and has not copied the work of others. This is my own research work.
The data and secondary information used in the thesis are sourced and clearly cited. This statement is entirely my responsibility. ACKNOWLEDGEMENTS First and foremost, I would like to express my sincere gratitude to my thesis advisor, Dr. Le Hong Thai, for his guidance, support, and valuable feedback throughout the entire process.
Their expertise and encouragement have been instrumental in the successful completion of this thesis. I would also like to thank the faculty and staff of the University of Economic and Business, Vietnam National University, especially Faculty of Finance and Banking, who provided me with the necessary resources, knowledge, and opportunities to pursue my academic interests and achieve my goals. Furthermore, I would like to express my appreciation to my family and friends for their unwavering support, love, and encouragement throughout my academic journey. Their belief in me has been a constant source of motivation and inspiration.
Last but not least, I would like to thank all the frontline workers, healthcare professionals, and essential workers who have been working tirelessly to keep our communities safe during the COVID-19 pandemic. Their dedication and sacrifice have been aninspiration to me and many others. In conclusion, this thesis would not have been possible without the support and contribution of all the individuals and organizations mentioned above. | am deeply grateful for their assistance and will always carry their influence with me in my future endeavors.
TABLE OF CONTENTS DECLARATTION. án HH HH HH TH HH TH TH KH THHHHYHTHHHTEHHTKELSETEEEEELHTEETrtirrtriei ii ACKNOWLEDGEMENTTS. HH HH HH1 HT rrerrerrrrer ili LIST OF ABBREVIATION .eesesssssessessesssssessessessesseeseesessessessssessssssssessnessssessneseessesneansaeeaeeaseaseaseaseessensessessees vi LIST OF TABLUES.- th HH HH HH HH TH TT HH HHEREEEEEEEETETETEEEEkrkrker vii LIST OF FIGURES. ch HH TH HH HH HH TH TH HH HH TH TH TH KHE EEEEEEESEEEETEEETSTk viii CHAPTER 1: INTRODUCTION .---e--s-s++kkekEkkEEEkxtEHkt HH HH HH TH HH HH HH1 H111.
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Interest rate theory: term Structure Of interest F(GE@S. Factors affecting interest rates. Monetary policy responses of countries around the world during COVID-19 pandemic. 19 CHAPTER 3: RESEARCH METHODOLOY.
«5c HH HH rkt 26 3. _ The TVP-VAR-based dynamic connectedness approach.cchnhHnHHHYnHHHHnHHHHHH HH HH HH 1111111010111101111exkt 28 3. Indicators Of Monetary POLICY PPPPPRRARRh. «se hàng HH HH HH HH HH1 .11111111001111101111111eH0l 30 CHAPTER 4: RESULTS AND DISCUSSION.
HH HH HH H111. Results of TVP-VAR Model. ng ni 36 CHAPTER 5: CONCLUSION.- c5 HH HH HH HH HH HH Hà 48 5. Summary of research results.
Limitations of the present study and directions for future researCh. nọ HH HH KH TH HH TH HH TH TH HH. 51 LIST OF ABBREVIATION [Abbreviations — |[Fullname COVID-19 Coronavirus disease 2019 VAR vector autoregression FED the US Federal Reserve GDP Gross Domestic Product NIRPs negative interest rate policies TCIS total connectedness indexes QE quantitative easing BoE The Bank of England UAE United Arab Emirates BoK The Bank of Korea BIC Bayesian information criterion NPDC net pairwise directional connectedness SSR Shadow Short Rate EU UK-European Union vi LIST OF TABLES Table 4. Average connectedness me€aSUIF©.
mm vii LIST OF FIGURES Figure 4. Dynamic total connectedneSS .-- -- -- 1t TT TH TH HH HH HH 38 Figure 4. Total directional connectedness to othe€rS.-- -- (S1 HH HH nh 40 Figure 4. 3 Total directional connectedness FROM othe:.
Net total directional connectedness.-- SH HH TH HH HH HH Hy 44 Figure 4. 46 viii CHAPTER 1: INTRODUCTION 1. Research background The COVID-19 pandemic has brought unprecedented challenges to the global economy and financial markets. In response, central banks around the world have implemented unprecedented monetary policy measures to mitigate the economic impacts of the pandemic.
One of the key tools used by central banks is interest rates, which they have cut to record lows or even negative territory in some countries. The COVID-19 pandemic has had a profound impact on the global economy, leading to an unprecedented disruption of financial markets worldwide. The central banks of major economies have responded to this crisis by introducing a range of monetary policies aimed at mitigating the economic shock caused by the pandemic. As part of these efforts, central banks have reduced interest rates to near-zero levels, leaving little room for further rate cuts in the event of future economic shocks.
As a result, many central banks have turned to unconventional monetary policy tools, such as quantitative easing and forward guidance, to provide additional support to their economies. One of the challenges faced by policymakers in this environment is assessing the effectiveness of their monetary policies. One way to evaluate the effectiveness of monetary policies is to examine the co-movement among short shadow rates during the pandemic. Shadow rates are hypothetical interest rates derived from market prices, which can provide insights into the stance of monetary policy.
The co-movement among short shadow rates during the pandemic is an important research question because it can help us understand the degree to which monetary policies have been coordinated across major economies during this crisis. If there is a high degree of co-movement among short shadow rates, it could suggest that central banks have been acting in a coordinated manner to stabilize global financial markets. Alternatively, if there is a low degree of co-movement among short shadow rates, it could suggest that central banks have been pursuing divergent policies in response to the pandemic, potentially leading to destabilizing effects on global financial markets. Previous research has examined the co-movement among short-term interest rates in the context of global financial crises.
For example, Eichengreen and Rose (1998) found evidence of co-movement among short-term interest rates during the 1930s depression, 1 which they interpreted as evidence of a "global liquidity trap." Similarly, Forbes and Rigobon (2002) found evidence of co-movement among short-term interest rates during the Asian financial crisis of the late 1990s, which they attributed to coordinated policy responses by central banks in the region. More recently, several studies have examined the co-movement among short shadow rates during the COVID-19 pandemic. Krippner (2020) found evidence of high co- movement among short shadow rates in G7 countries, which he attributed to coordinated policy responses by central banks. Liu et al.
(2021) found evidence of high co-movement among short shadow rates in emerging market economies, which they attributed to spillover effects from developed economies. However, there are several gaps in the existing literature that this study aims to address. First, most studies have focused on the co-movement among short-term interest rates, rather than shadow rates, which can provide a more nuanced view of monetary policy. Second, most studies have focused on developed economies, rather than examining the co-movement among short shadow rates in a broader range of countries.
Finally, most studies have examined the co-movement among short shadow rates during the early stages of the pandemic, rather than examining whether this co-movement has persisted over time. This study aims to fill these gaps in the literature by examining the co-movement among short shadow rates in a broad range of economies during the COVID-19 pandemic. Specifically, we will examine the extent to which short shadow rates have moved together across different regions, and whether this co-movement has persisted over time. Our analysis will contribute to a better understanding of the effectiveness of monetary policies during the pandemic and provide insights into the degree of coordination among central banks in response to this crisis.
Research objectives The research objective of this graduation thesis is to examine the co-movement among short shadow rates during the COVID-19 pandemic. Specifically, the thesis aims to investigate whether the short shadow rates of different countries moved together during the pandemic period, and if so, to what extent. This analysis could provide insights into the behavior of financial markets during a crisis and inform policymakers on how to respond to similar events in the future. To achieve this objective, the thesis may use econometric techniques to analyze time- series data on short shadow rates from various countries.
The study may also consider factors such as changes in monetary policy and macroeconomic conditions during the pandemic that could have influenced the co-movement of short shadow rates. Overall, the research objective of this graduation thesis is to contribute to our understanding of how short shadow rates behaved during the COVID-19 pandemic and what factors may have influenced their co-movement. Research questions Specifically, this thesis plans to answer the following three research questions: - How have short shadow rates behaved during the COVID-19 pandemic? - To what extent do short shadow rates co-move with each other during the COVID-19 pandemic? - What implications do the findings have for policymakers and investors? 1. Research scope - Scope of content: the connectedness among short shadow rates during the COVID-19 period for selected economies or regions.
- Scope of space: United States of America, European Union, Japan, United Kingdom, Switzerland, Canada, Australia, New Zealand and G4 groups. - Scope of time: during the period from January 2n4, 2019 to March 271%, 2023 1. Research contributions Understanding the behavior of short shadow rates during the COVID-19 pandemic: The thesis can provide insights into how short shadow rates have behaved during the pandemic and how they have co-moved with each other. This can help researchers and policymakers better understand the impact of the pandemic on financial markets and the economy.
Examining the relationship between short shadow rates and traditional interest rates: By examining the co-movement among short shadow rates, the thesis can shed light on the relationship between short shadow rates and traditional interest rates. This can help researchers and policymakers better understand the transmission mechanism of monetary policy. Developing a methodology for analyzing co-movement among short shadow rates: The thesis can contribute to the development of a methodology for analyzing the co- movement among short shadow rates. This can be useful for future research on short shadow rates and their relationship with traditional interest rates.
Providing insights for investors and financial institutions: The thesis can provide insights for investors and financial institutions on the behavior of short shadow rates during the pandemic. This can help them make more informed investment decisions and manage risk more effectively. Overall, the graduation thesis "Examining the Co-movement Among Short Shadow Rates during COVID-19" can make important contributions to the understanding of short shadow rates, their behavior during the pandemic, and their relationship with traditional interest rates. Structure of the thesis The thesis begins with a literature review of the relevant literature on shadow rates and their use in analyzing monetary policy (Chapter 2).
The literature review will also explore the various monetary policy measures implemented by central banks during the pandemic, including quantitative easing, forward guidance, and negative interest rates. Chapter 3 will introduce the research data and the methodology. The next section of the thesis (Chapter 4) will present an empirical analysis of the co-movement of short shadow rates across the nine countries. This analysis will be conducted using a vector autoregression (VAR) model, which allows for the simultaneous analysis of multiple variables and their interrelationships over time.
The analysis will explore the degree to which short shadow rates move together across countries and whether this co-movement has increased during the pandemic. The final section of the thesis (Chapter 5) will discuss the implications of the findings for central bank policy and the broader global economy.