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A signal of imperfect portfolio capital adjustments from the domestic and foreign Colombian debt

This paper studies the relationship between the yields of the Colombian bonds traded in the domestic (secondary) market and the yields of the sovereign global securities traded abroad during 1999-2001. The hypothesis successfully tested is that, under capital mobility, a comovement should exist between the two yields. However, the results suggest that capital mobility is not perfect. By invoking concepts of duration and immunization evidence is found of an M-TAR adjustment cointegration between the two yields plus a constant risk premium for bonds with maturity in 2003 and a symmetric adjustment cointegration plus a risk term between the yields of securities with maturity in 2004. Since these assets are issued by the same issuer (the Colombian Government) the credit risk is the same for them while the study considers that the risk premium is purely connected to currency risks produced by exchange-rate and inflation risks.

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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 15 (2005)
Issue (Month): 9 ()
Pages: 587-597

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Handle: RePEc:taf:apfiec:v:15:y:2005:i:9:p:587-597
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  1. Lucio Sarno & Mark Taylor, 1998. "Exchange controls, international capital flows and saving-investment correlations in the UK: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(1), pages 69-98, March.
  2. Meese, R. & Rogoff, K., 1988. "Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period," Working papers 368, Wisconsin Madison - Social Systems.
  3. R. Dornbusch, 1975. "Exchange Rate Dynamics," Working papers 167, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Enders, Walter & Granger, C. W. J., 1998. "Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Staff General Research Papers 1388, Iowa State University, Department of Economics.
  5. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  6. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  8. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February.
  9. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
  10. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  11. Alan M. Taylor, 1994. "Domestic Saving and International Capital Flows Reconsidered," NBER Working Papers 4892, National Bureau of Economic Research, Inc.
  12. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
  13. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
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