The impact of sovereign risk on bond duration: Evidence from Asian sovereign bond markets
This paper examines the effect of sovereign risk on bond duration. We compare the sovereign risk-adjusted duration for U.S. dollar-denominated Asian sovereign bonds with their Macaulay duration for both investment grade bonds and speculative grade bonds. We find that the sovereign risk-adjusted duration is significantly shorter than its Macaulay counterpart for all bonds, regardless of their bond rating and their maturity. Further, the "shortening" effect of sovereign risk on duration gets stronger as bond rating deteriorates and in recessionary conditions. Our findings provide strong support for the importance of adjusting for sovereign risk when bond portfolio managers apply the popular duration measure to hedge interest rate risk.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1979. "Duration and the Measurement of Basis Risk," The Journal of Business, University of Chicago Press, vol. 52(1), pages 51-61, January.
- Duan, J. & Sealey, C. W. & Yan, Y., 1999. "Managing banks' duration gaps when interest rates are stochastic and equity has limited liability," International Review of Economics & Finance, Elsevier, vol. 8(3), pages 253-265, September.
- Pierre L. Siklos, 2008. "Determinants of Emerging Market Spreads: Domestic, Global Factors, and Volatility," Working Papers 182008, Hong Kong Institute for Monetary Research.
- Gianluigi Ferrucci, 2003. "Empirical determinants of emerging market economies' sovereign bond spreads," Bank of England working papers 205, Bank of England.
- Fisher, Lawrence & Weil, Roman L, 1971. "Coping with the Risk of Interest-Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategies," The Journal of Business, University of Chicago Press, vol. 44(4), pages 408-31, October.
- Nawalkha, Sanjay K., 1996. "A contingent claims analysis of the interest rate risk characteristics of corporate liabilities," Journal of Banking & Finance, Elsevier, vol. 20(2), pages 227-245, March.
- Gady Jacoby, 2003. "A Duration Model For Defaultable Bonds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(1), pages 129-146.
- Ila Patnaik & Ajay Shah & Anmol Sethy & Vimal Balasubramaniam, 2010.
"The exchange rate regime in Asia : From Crisis to Crisis,"
Finance Working Papers
21852, East Asian Bureau of Economic Research.
- Patnaik, Ila & Shah, Ajay & Sethy, Anmol & Balasubramaniam, Vimal, 2011. "The exchange rate regime in Asia: From crisis to crisis," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 32-43, January.
- Patnaik, Ila & Shah, Ajay & Sethy, Anmol & Balasubramaniam, Vimal, 2010. "The exchange rate regime in Asia: From crisis to crisis," Working Papers 10/69, National Institute of Public Finance and Policy.
- Ajay Shah & Ila Patnaik & Anmol Sethy & Vimal Balasubramaniam, 2010. "The Exchange Rate Regime in Asia: From Crisis to Crisis," Working Papers id:2582, eSocialSciences.
- Yan Alice Xie & Sheen Liu & Chunchi Wu, 2005. "Duration, Default Risk, And The Term Structure Of Interest Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(4), pages 539-554.
- Beck, Roland, 2001. "Do country fundamentals explain emerging market bond spreads?," CFS Working Paper Series 2001/02, Center for Financial Studies (CFS).
- Hopewell, Michael H & Kaufman, George G, 1973. "Bond Price Volatility and Term to Maturity: A Generalized Respecification," American Economic Review, American Economic Association, vol. 63(4), pages 749-53, September.
- Xie, Yan Alice & Liu, Sheen & Wu, Chunchi & Anderson, Bing, 2009. "The effects of default and call risk on bond duration," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1700-1708, September.
- Yan, Alice Xie & Shi, Jian & Wu, Chunchi, 2008. "Do macroeconomic variables matter for pricing default risk?," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 279-291.
- Acharya, Viral V & Carpenter, Jennifer, 2002.
"Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy,"
CEPR Discussion Papers
3328, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Jennifer N. Carpenter, 2002. "Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1355-1383.
- Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
- Chance, Don M, 1990. " Default Risk and the Duration of Zero Coupon Bonds," Journal of Finance, American Finance Association, vol. 45(1), pages 265-74, March.
- Vivian Z. Yue & Samir Jahjah, 2004. "Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries," IMF Working Papers 04/210, International Monetary Fund.
- Kraft, Holger & Munk, Claus, 2007. "Bond durations: Corporates vs. Treasuries," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3720-3741, December.
- Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:20:y:2011:i:3:p:441-451. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.