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Expectations and Equilibrium in High-Grade Australian Bond Markets

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Author Info

  • 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.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 08 (2005)
Issue (Month): 04 ()
Pages: 573-592

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Handle: RePEc:wsi:rpbfmp:v:08:y:2005:i:04:p:573-592

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Related research

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

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Cited by:
  1. Sanjeev K. Routray, 2006. "Two Kinds of Activism: Reflections on Citizenship in Globalising Delhi," Working Papers id:463, eSocialSciences.

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