A0498
Title: The pandemic and government bonds: Evidence from volatility smiles in Japan
Authors: Etsuro Shioji - Chuo University (Japan) [presenting]
Abstract: The focus is on how the financial market has reacted to the aggressive fiscal and monetary policies that have been implemented since the outbreak of the COVID-19 in Japan. Even before the pandemic, the country's debt to GDP ratio was well over 200\%. The situation has grossly worsened since February 2020. On the other hand, under the Bank of Japan's Yield Curve Control policy, almost half of the Japanese Government Bonds (JGBs hereafter) were in the central bank's hands in the pre-pandemic period. The size of the Bank's balance sheet has further expanded since then. Prices of the JGB futures options are analyzed to measure the policies' influences on private-sector perceptions about the future course of the JGB market. To that end, we derive ``volatility smiles'' from those option prices on daily basis. We study how the location and the shape of the smile curve have responded to the introduction of the new policy measures.
