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Expectations and Equilibrium in High-Grade Australian Bond Markets

Author

Listed:
  • Francis In

    (Department of Accounting and Finance, Monash University, Clayton Campus, Victoria 3168, Australia)

  • Jonathan A. Batten

    (Graduate School of Management, Macquarie University, CBD Campus Level 6, 51-57 Pitt St, Sydney, NSW 2000, Australia)

Abstract

This paper examines the equilibrium implications of the Expectations Hypothesis of term structure to different maturities of high-grade Australian dollar denominated Eurobonds and Australian Government bonds (AGBs) using the Canonical Cointegrating Regression (CCR) technique developed by Econometrica 60 (1992) 119. Our findings provide evidence only for equilibrium relationships between each group of bonds based on credit class, but not between any of the subsets of AGBs and the Eurobonds. Furthermore, the error correction model supports theory with the most liquid, long-term 10-year AGB driving the AGB term structure, with short-term yields adjusting to movements in the long-run yields, though the opposite is true for Eurobonds. The lesson for markets is to simplify the risk management task.Managers are advised to treat portfolios of equivalent credit class separately for hedging and risk management.

Suggested Citation

  • Francis In & Jonathan A. Batten, 2005. "Expectations and Equilibrium in High-Grade Australian Bond Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 573-592.
    • Handle: RePEc:wsi:rpbfmp:v:08:y:2005:i:04:n:s0219091505000543
    DOI: 10.1142/S0219091505000543
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    References listed on IDEAS

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    1. Benjamin H Cohen, 1999. "Monetary Policy Procedures and Volatility Transmission along the Yield Curve," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-22, Bank for International Settlements.
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    Cited by:

    1. Valentina Galvani & Stuart Landon, 2013. "Riding the yield curve: a spanning analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 135-154, January.

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    More about this item

    Keywords

    Long-run relationship; expectations hypothesis; Australian dollar Eurobonds; Canonical Cointegrating Regression; GARCH; JEL Classification: G10; JEL Classification: G15; JEL Classification: C22;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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