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Modelling Long Memory and Risk Premia in Latin American Sovereign Bond Markets

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  • Alfonso Mendoza

    (The University of York)

Abstract

A 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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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0410004.

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Length: 28 pages
Date of creation: 05 Oct 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0410004

Note: Type of Document - pdf; pages: 28. 28 pages, PDF
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Web page: http://128.118.178.162

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Keywords: Financial Stability; Credit Risk; Default Risk Contagion; Long Memory; Bivariate FIGARCH(1; d; 1)-in-Mean; Emerging Markets.;

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