Modelling long memory and risk premia in Latin American sovereign bond markets
AbstractA family of credit risk models is proposed to capture three salient features of Latin American (LA) Sovereign Bond Markets: individual Long Range Dependence in volatility---Long Memory (LM)---, high fractional comovement and time varying risk premia. Evidence in favor of LM is uncovered and the extent of Default Risk Contagion in these markets during the nineties is measured. Among others, the results suggest that the response of bond spread changes to volatility shocks is not statistically different, indicating that a common source may be driving the market. Also, the extent of fractional comovement is high and the magnitude of the risk premia for investing in these bond markets is substantial. Our suggested family of bivariate Fractional Integrated GARCH-in-Mean models is preferred to Brunetti (2000) and TeyssiÃ¨re (1998) processes as indicated by Schwartz Information Criteria and Likelihood Ratio tests.
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Bibliographic InfoPaper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2003 with number 65.
Date of creation: 27 Sep 2004
Date of revision: 13 Oct 2004
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Other versions of this item:
- Alfonso Mendoza, 2004. "Modelling Long Memory and Risk Premia in Latin American Sovereign Bond Markets," Econometrics 0410004, EconWPA.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- G1 - Financial Economics - - General Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
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