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The Systematic Risk Of Debt: Australian Evidence

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  • KEVIN DAVIS
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    Abstract

    This paper examines systematic risk (betas) of Australian government debt securities for the period 1979-2004 and makes three contributions to academic research and practical debate. First, the empirical work provides direct evidence on the systematic risk of government debt, and provides a benchmark for estimating the systematic risk of corporate debt which is relevant for cost of capital estimation and for optimal portfolio selection by asset managers such as superannuation funds. Second, analysis of reasons for non-zero (and time varying) betas for fixed income securities aids understanding of the primary sources of systematic risk. Third, the results cast light on the appropriate choice of maturity of risk free interest rate for use in the Capital Asset Pricing Model and have implications for the current applicability of historical estimates of the market risk premium. Debt betas are found to be, on average, significantly positive and (as expected) closely related, cross sectionally, to duration. They are, however, subject to significant time series variation, and over the past few years the pre-existing positive correlation between bond and stock returns appears to have vanished. Copyright Blackwell Publishing Ltd/ University of Adelaide and Flinders University 2005..

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Australian Economic Papers.

    Volume (Year): 44 (2005)
    Issue (Month): 1 (03)
    Pages: 30-46

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    Handle: RePEc:bla:ausecp:v:44:y:2005:i:1:p:30-46

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0004-900X

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    Cited by:
    1. Johansson, Anders C., 2009. "Asian Sovereign Debt and Country Risk," Working Paper Series 2009-11, China Economic Research Center, Stockholm School of Economics.
    2. Christian Klein & Christoph Stellner, 2014. "The systematic risk of corporate bonds: default risk, term risk, and index choice," Financial Markets and Portfolio Management, Springer, vol. 28(1), pages 29-61, February.

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