Dynamic equilibrium correction modelling of yen Eurobond credit spreads
AbstractUnderstanding the long term relationship between the yields of risky and riskless bonds is a critical task for portfolio managers and policy makers. This study specifies an equilibrium correction model of the credit spreads between Japanese Government bonds (JGBs) and Japanese yen Eurobonds with high quality credit ratings. The empirical results indicate that the corporate bond yields are cointegrated with the otherwise equivalent JGB yields, with the spread defining the cointegration relation. In addition the results indicate that the equilibrium correction term is highly statistically significant in modelling credit spread changes. Another important factor is the risk-free interest rate with the negative sign, while there is little evidence of the contribution of the asset return to the behaviour of spreads.
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Bibliographic InfoPaper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp127.
Date of creation: 05 Apr 2006
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-22 (All new papers)
- NEP-FIN-2006-04-22 (Finance)
- NEP-FMK-2006-04-22 (Financial Markets)
- NEP-MON-2006-04-22 (Monetary Economics)
- NEP-SEA-2006-04-22 (South East Asia)
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