Dynamic Equilibrium Correction Modelling of Yen Eurobond Credit Spreads

37 Pages Posted: 12 Aug 2006

See all articles by Seppo Pynnonen

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics

Jonathan A. Batten

RMIT University

Warren P. Hogan

University of Technology, Sydney - School of Finance and Economics

Date Written: March 2006

Abstract

Understanding the long term relationship between the yields of risky and riskless bonds is a critical task for portfolio managers and policy makers. This study specifies an equilibrium correction model of the credit spreads between Japanese Government bonds (JGBs) and Japanese yen Eurobonds with high quality credit ratings. The empirical results indicate that the corporate bond yields are cointegrated with the otherwise equivalent JGB yields, with the spread defining the cointegration relation. In addition the results indicate that the equilibrium correction term is highly statistically significant in modelling credit spread changes. Another important factor is the risk-free interest rate with the negative sign, while there is little evidence of the contribution of the asset return to the behaviour of spreads.

Suggested Citation

Pynnonen, Seppo and Batten, Jonathan A. and Hogan, Warren P., Dynamic Equilibrium Correction Modelling of Yen Eurobond Credit Spreads (March 2006). IIIS Discussion Paper No. 127, Available at SSRN: https://ssrn.com/abstract=923768 or http://dx.doi.org/10.2139/ssrn.923768

Seppo Pynnonen (Contact Author)

University of Vaasa, Department of Mathematics and Statistics ( email )

Wolffintie 34
65200 Vaasa
Finland
+358-21-449 8311 (Phone)

HOME PAGE: http://www.uwasa.fi/~sjp/

Jonathan A. Batten

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

Warren P. Hogan

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 7730 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=91

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