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

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Author Info
Alfonso Mendoza (The University of York)

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

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

Note: Type of Document - pdf; pages: 28. 28 pages, PDF
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Related research
Keywords: Financial Stability; Credit Risk; Default Risk Contagion; Long Memory; Bivariate FIGARCH(1; d; 1)-in-Mean; Emerging Markets.;

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Find related papers by JEL classification:
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
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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    Other versions:
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  8. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September. [Downloadable!] (restricted)
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