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 Teyssière (1998) processes as indicated by Schwartz Information Criteria and Likelihood Ratio tests.
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Length: 28 pages
Date of creation: 05 Oct 2004
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Financial Stability; Credit Risk; Default Risk Contagion; Long Memory; Bivariate FIGARCH(1; d; 1)-in-Mean; Emerging Markets.;
Other versions of this item:
- Alfonso Mendoza, 2004. "Modelling long memory and risk premia in Latin American sovereign bond markets," Money Macro and Finance (MMF) Research Group Conference 2003 65, Money Macro and Finance Research Group, revised 13 Oct 2004.
- F3 - International Economics - - International Finance
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- 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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