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Managing Risk in Sovereign Bond Portfolios: The Impact of Sovereign and Call Risks on Duration

In: International Financial Markets

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  • Yan Alice Xie
  • Jot Yau
  • Hei Wai Lee

Abstract

The study examines the joint effect of sovereign and call risks on the duration of callable sovereign bonds over the period 1996–2011. The results indicate that the sovereign risk-adjusted duration is significantly shorter than its Macaulay counterpart for U.S. dollar-denominated investment-grade callable sovereign bonds. Further, the “shortening” effect of sovereign and call risks on duration is generally stronger among bonds of lower ratings. Similar results are obtained when CDS prices are used as a proxy for changes in sovereign risk. Results from this study emphasize the importance of considering the joint effect of sovereign and call risks in managing the interest rate risk exposure in fixed income investments.

Suggested Citation

  • Yan Alice Xie & Jot Yau & Hei Wai Lee, 2014. "Managing Risk in Sovereign Bond Portfolios: The Impact of Sovereign and Call Risks on Duration," Frontiers of Economics and Globalization, in: International Financial Markets, volume 13, pages 109-124, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:fegzzz:s1574-8715(2013)0000013011
    DOI: 10.1108/S1574-8715(2013)0000013011
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    More about this item

    Keywords

    Sovereign risk; call risk; duration; yield spreads; G12; G15;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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