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Dynamic interaction and valuation of quality yen Eurobonds in a multivariate EGARCH framework

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  • Jonathan Batten
  • Francis In

Abstract

This study applies a multivariate EGARCH model, developed from the closed-form valuation model of Longstaff and Schwartz (1995), to explain the time-varying volatility of credit spreads on AAA and AA rated yen Eurobonds with different maturities. While the results support the theoretical proposition that relative credit spreads returns are negatively related to both changes in Japanese Government Bond (JGB) yields and changes in the Nikkei 225 Index, the key innovation of this study is that there is also evidence of a high level of volatility interaction and persistence between yen Eurobonds. However the volatility transmission mechanism is asymmetric in that negative innovations tend to increase the volatility in other bonds more than positive innovations.

Suggested Citation

  • Jonathan Batten & Francis In, 2006. "Dynamic interaction and valuation of quality yen Eurobonds in a multivariate EGARCH framework," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 881-892.
  • Handle: RePEc:taf:apfiec:v:16:y:2006:i:12:p:881-892
    DOI: 10.1080/09603100600684757
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    References listed on IDEAS

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    1. Gregory R. Duffee, 1996. "Treasury yields and corporate bond yield spreads: an empirical analysis," Finance and Economics Discussion Series 96-20, Board of Governors of the Federal Reserve System (U.S.).
    2. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-556, June.
    3. Madan, Dilip & Unal, Haluk, 2000. "A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(01), pages 43-65, March.
    4. Brunner, Allan D & Simon, David P, 1996. "Excess Returns and Risk at the Long End of the Treasury Market: An EGARCH-M Approach," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(3), pages 443-457, Fall.
    5. Jung-Hee Lee & B. Wade Brorsen, 1997. "A non-nested test of GARCH vs. EGARCH models," Applied Economics Letters, Taylor & Francis Journals, vol. 4(12), pages 765-768.
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