Asymmetry in return and volatility spillover between China's interbank and exchange T-bond markets

- Return spillover is asymmetric in two aspects: the sign of the shock and the origin of the shock.
- Exchange T-bond volatility increases are higher for negative exchange T-bond return shocks than for positive ones.
- There only exists a pattern of volatility spillover from the exchange T-bond market into the interbank T-bond market.

We document asymmetry in return and volatility spillover between interbank and exchange T-bond markets in China for daily returns during the period 2006-2013 using a bivariate GARCH modeling approach. Our empirical findings suggest that return spillover is asymmetric in two aspects: the sign of the shock (good news or bad news) and the origin of the shock (interbank market or exchange market). Good news originating in the exchange market leads to higher interbank returns while bad news has no significant impact. By contrast, both good and bad news from the interbank market lead to higher exchange returns, albeit in different sizes. In relation to volatility asymmetry, exchange T-bond volatility increases are significantly higher for negative exchange T-bond return shocks than for positive ones. In contrast, interbank T-bond volatility behavior is empirically indistinguishable from a symmetric process. Furthermore, there only exists a pattern of volatility spillover from the exchange T-bond market into the interbank T-bond market.