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Pricing Bonds in the Australian Market

Author

Listed:
  • Christopher M. Bilson

    (School of Finance and Applied Statistics, Australian National University, Canberra ACT 0200.)

  • Timothy J. Brailsford

    (UQ Business School, The University of Queensland, St Lucia QLD, 4072)

  • Luke J. Sullivan

    (Citigroup Investment Research, New York USA.)

  • Sirimon Treepongkaruna

    (School of Finance and Applied Statistics, Australian National University, Canberra ACT 0200.)

Abstract

This paper provides an examination of term structure models in the Australian bond market. Specifically, we examine the comparative ability of various models to forecast at the short, medium and long ends of the yield curve. Overall, we find that model performance varies along the yield curve. Out-of-sample pricing tests show that most of the term structure models underprice a bond at the short and medium ends of the term structure and generally overprice bonds at the long end. Further, the level of mispricing is related to time-to-maturity, coupon payments and interest rate volatility. The results have implications for bond pricing in relatively illiquid markets like Australia's.

Suggested Citation

  • Christopher M. Bilson & Timothy J. Brailsford & Luke J. Sullivan & Sirimon Treepongkaruna, 2008. "Pricing Bonds in the Australian Market," Australian Journal of Management, Australian School of Business, vol. 33(1), pages 123-143, June.
    • Handle: RePEc:sae:ausman:v:33:y:2008:i:1:p:123-143
    DOI: 10.1177/031289620803300107
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    References listed on IDEAS

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    3. Vijay A. Murik, 2013. "Bond pricing with a surface of zero coupon yields," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(2), pages 497-512, June.

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